Determining the right KPI

The right KPI is a leading indicator to revenue and overall company valuation. The right KPI is the event that best captures the value generated for your users. It also overlaps with the “Aha” or “Wow” moment. 

This Key Performance Indicator typically 

  1. Correlates with retention, then expansion of use and finally referrals
  2. Is not necessarily revenue 
  3. Usually it can grow without sales or marketing 

Correlates with retention

Retention and expansion of use will lead to sustainable and exponential growth better than just acquisition and conversion 

The higher the frequency of that one value generating event the more likely your user will keep using your product over time and even increase the use of your product over time, and since they keep using it and use it more over time it is also very likely they will tell other people about it. 

Think of a time when you went to (or ordered from) a local restaurant, took a bite of the food, you stopped and exclaimed “OMG this is so good, wow.” 

Now if you had that reaction your probably kept visiting or ordering from that place, and I bet you also told more people about it or invited them to go with you. 

In that story of your favorite restaurant you have retention of use, expansion of use and you became a referrer of more customers. 

It is not necessarily revenue 

Exponential revenue is an inevitability of delivering “wow” moments, it’s the end result, but it’s not the how you get there. 

Tracking revenue is super important for having cash in the bank, but it’s not very useful when trying to set a core KPI for the whole business or when trying to work on product to improve retention and expansion of use.

In this local restaurant example the wow moment is measured at the moment the user tries the food, not when they pay for the food. You may have paying patrons but they may not return, they may not keep coming back, and certainly, they are not bringing their friends with them. 

Now let’s extrapolate our restaurant example with a gym example. Most gyms measure revenue or paying customers, but they are not measuring retention and expansion of use and most are not observing when and how people use the gym. Which is why when I cancel my gym membership after two months, that’s when they gym is alerted and by then it’s certainly too late to do anything to retain me. 

Measuring revenue as your KPI leads to growing revenue through customer acquisition, measuring conversion, average lifetime value, average customer acquisition cost. The problem with only measuring those is that often founders are not measuring change over time, and the cheap cohorts are acquired and lost in the beginning and as time goes on, it becomes more and more expensive to acquire the next batch of users. 

Most of the energy is wasted on optimizing for ever more expensive acquisition rather than focusing on improving retention and expansion of use of the users that have been acquired already.

The right core KPI can grow without marketing and sales

If the only way you can grow your KPI is by adding new users, you are depending purely on acquisition, then you will not be measuring retention and expansion of use, and your entire business will depend solely on your sales and marketing efforts. 

The right KPI is the one that you can grow by improving the product with your existing users and not only retaining them longer but also leading them to use the product more. 

For example:

As an Uber user in 2011 in NYC, I only used about once a week. At that point they only had UberBlack, the high end GMC luxury vehicles. Then they opened up UberX, UberExpress, UberEats and my KPI (completed trips) increased significantly within any particular user, not just by adding new users. 

An added benefit of having a KPI that increases not just with sales and marketing is that now every area of your team can add to that core KPI

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