Key metrics for social impact startups
Common business KPIs to track
We already discussed the notion of “social startup” in the past. As seen, a newly established business cannot always be considered to be one. Yet, let’s suppose for a moment that your organization falls into this category. What indicators would you measure to understand your business performance? What KPIs would you track? In this article, we analyze some of the most common business metrics for social impact startups.
Defining “metrics” and “KPIs”
First things first. Both socially-oriented startups and more traditional profit-driven ones must measure their performances in order to understand if (and how well) they are reaching their business goals. But how to do so? That’s where metrics and KPIs come handy.
Business metrics are quantifiable indicators organizations use to track and analyze their processes and performances. For a manager interested in gauging how the company is executing, it’s important to identify the most critical ones early on. Collecting data can indeed be costly and time consuming. Needless to say, managers should avoid squandering resources measuring irrelevant metrics, especially when working for early-stage social impact startups. So, out of the hundreds of indicators available out there, they must select only the most critical and important ones: those we commonly call (you already got it, right?) “key performance indicators”. In other words, metrics that are laser-focused on business strategy and that truly communicate how the business is running.
As some would say, “a KPI is a always a metric, but a metric is not always a KPI“. Depending on the type, stage and industry of a business, managers may choose to prioritize different KPIs. However, some metrics are usually tracked down and measured by them all. So, let’s now find out some of the most widely diffused metrics for social startups.
“Customer Acquisition Cost” (CAC)
Customer acquisition cost describes the amount of finances (namely, the cost) for a startup to acquire a new customer. It’s usually calculated as the total costs of sales and marketing divided by the number of new customers acquired during a given timeframe. Startup businesses, and particularly social impact ones, must be aware of their CAC and should constantly try to lower it down. As a matter of fact, a low customer acquisition cost can help startups sustain growth and expand their customer base while spending limited resources.
“Customer Lifetime Value” (CLV)
As said, CAC helps managers understand how much acquiring a new customer may cost them. But for every new customer, what’s in it for the company? That’s exactly what customer lifetime value focuses on.
CLV measures indeed the total expected revenues coming from a single customer over the course of its relationship with the company. According to Ash Maurya, a reasonable estimation for reaching sustainable growth is when the customer lifetime value is (at least) three times higher than CAC. Common strategies implemented by startups eager to improve CLV include: increasing pricing, up-selling and cross-selling products or services. At times, social startups may consider doing the same. But for those selling directly to their beneficiaries things can get a bit more complicated, as affordability is often key and price increase may not be a viable option. In such cases, what impact organizations can do instead is improving fidelity, which we’ll cover in the next section.
“Retention Rate” (RR) and “Churn Rate” (CR)
We just spoke about “fidelity“. As you guess, it’s probably cheaper and more convenient for any startup to retain existing customers rather than acquiring new ones. Furthermore, some organizations sell value propositions directly to their beneficiaries through recurring revenue patterns. Here, in order to truly generate impact, they must make sure use that the target audience keep purchasing – and using – their products/services along time. Thus, measuring customer loyalty is fundamental here.
Startups falling into this scenario can choose to either track retention rate, which indicates the percentage of customers who stay with the organization at the end of a given period (week, month, year), or churn rate, which illustrates instead the percentage of those who walked away within the same period.
“Cash Burn Rate” (CBR)
Impact is a wonderful goal, but it’s difficult to achieve it when running out of money. Therefore, we can use the cash burn rate to highlight the rate at which a startup spends (“burns”) its cash reserves and cash balance. Typically recorded as a monthly rate, CBR is critical to comprehend if a startup is burning cash too quickly, risking going out of business. That’s why it’s strictly related to runway, a measure of the time left before running out of finances.
Finally, although profit shouldn’t be the ultimate goal, another important KPI to monitor is profit margin.
As a rule of thumb, profit margin is calculated as revenues minus costs, divided by costs. It is the ratio of profit remaining from sales after all expenses have been paid. Put it differently, it shows how much of every revenue dollar is flowing to the bottom line. Thanks to this metric, managers can have an insight into a startup’s ability to maintain sustainable growth in the long term and pay back the investments.
In this article, we analyzed some of the most common key metrics for social impact startups.
As seen, KPIs may vary depending on the industry and market a startup operates in. Yet, customer acquisition cost (CAC), customer lifetime value (CLV), churn rate (CR), burn rate (BR) and profit margin are usually key metrics every kind of startup should be measuring.
Apart from analyzing business performances, social enterprises should also create indicators to investigate impact performances. This idea is the core foundation of impact analysis and measurement, that we will further discuss in our upcoming article! 🙂
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