The Five Most Important KPIs for Software Startups to Track
Software startups have to work hard to survive beyond five years. The best way to do it is by tracking these five critical KPIs to stay on the path to success.
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Starting a new company is difficult. How difficult? So difficult that an estimated eight out of ten don't last beyond their fifth year. For software development companies, things may be even harder than that. The reasons for that are manifold. For one thing, many software development firms depend on a single product to fuel their bottom lines at the outset — and there's quite a bit that can go wrong with immature software products.
That reality means that anyone running a software development startup has to execute a perfectly choreographed high-wire act if they want their company to survive long enough to thrive. Doing that, however, requires vigilance, powered by as much real-world operational data as possible. However, not every software development startup knows which KPIs to watch to gauge their overall health and odds of success. To remedy that, here are the three most relevant KPI categories to software development startups and five specific KPIs every one of them should track.
The Three Relevant Types of KPIs
Broadly speaking, the KPIs that software companies should track fall within three major categories. They are:
This is the KPI category that encompasses every facet of the company's operations. It includes things like productivity metrics, project completion metrics, and efficiency statistics. Together, this category helps the business get the most bang for their budgetary buck.
This KPI category includes everything there is to know about the company's financial condition. It includes things like net profit metrics, budget accuracy metrics, and revenue statistics. It's the category that gives managers a broad view of the company's overall health.
For early-stage software startups, the customer metrics KPI category won't be too complex to track. This is because most software startups only have a few key customers to speak of. However, KPIs like customer lifetime value are a part of this category, and this is essential data a software firm can use to conduct reasonably accurate revenue forecasting.
Five Key KPIs for Software Startups to Track
Within the categories above, there are about five key KPIs that every software development startup should track. Doing so can give them the perspective they need to make smart decisions and improve their odds of long-term success. Here's what they are.
1. Revenue Concentration
For software startups, there's almost no financial metric that's more consequential than revenue concentration. It's a KPI that refers to where the company's revenue is coming from and how its spread amongst the customer base. This is critical because it lets managers know how much of a financial blow the loss of an important customer or two would be.
Broadly speaking, a business risks failure if any one of its customers accounts for 10% or more of total revenue or if its largest five customers make up 25% or more of its revenue base. Therefore, tracking revenue concentration can alert managers to the need to broaden the business's customer base to insulate it against a catastrophic loss of revenue.
2. Customer Churn Rate
While it's useful to know what percentage each customer represents of a software startup's revenue base, that information is meaningless unless you can estimate the odds of losing a customer. That's where the customer churn rate KPI comes into play. It's a measurement of how many customers the business should expect to lose over a given period.
This information is critical to informing new budgets and revenue forecasts, as well as for helping the company know what to invest in marketing and customer retention efforts. In other words, it tells the startup if they can depend on their loyal customers or if they need to go all-out in securing new ones to keep money coming into the business.
3. Customer Lifetime Value
Customer lifetime value is a KPI that goes hand-in-hand with revenue concentration. It's a metric that helps a business to know, relatively speaking, how valuable each of its customers really is. As previously mentioned, this is critical information that the business needs for its revenue forecasting. But that's not all.
It's also a KPI that can help guide parts of the software development process — especially change adoption and feature development. The bottom line is that software businesses need to be sensitive to the demands of valuable customers. So, if a large customer needs a particular new software feature or some additional workflow flexibility inside a product, it's a good idea to give it to them. Customer lifetime value data can act as a way to prioritize customer change requests so the most important customers always get what they need out of a given product.
4. Release Burndown
The next important KPI comes from the performance metrics category. It's release burndown. This is a measure of how well the business's software development teams are keeping up with release schedules. It's an important way that managers can maintain visibility into the work cadence taking place within a given software project.
The reason this is important is that most software customers need predictable software release schedules, be they monthly or quarterly. In both cases, release burndown data can help a software development company set release schedules they can actually fulfill. Otherwise, they run the risk of making promises to customers that they can't keep, and that's usually a one-way ticket to startup failure.
5. Wasted Effort
The wasted effort KPI refers to an efficiency metric that lets a software development company know how much money they're spending on tasks that ultimately don't make it into their final software products. This includes work on features that never end up in a product or on rewriting code in ways that don't explicitly improve a product. It is estimated that software development teams around the world waste a cumulative $1 billion every day on such wasted efforts.
Keeping track of the costs of wasted effort can help software development firms identify decision-making processes and parts of the development workflow that need rethinking. It can help them to run as lean as possible, which is essential for any software startup that wants to survive its early stages.
The Bottom Line
Obviously, it goes without saying that a software development startup needs to churn out quality software if it wants to survive and thrive. However, history is littered with development firms that made great software but failed because they couldn't parlay it into actual revenue streams. By monitoring the KPIs above, a software startup manager can keep their company on a path to sustainable success.
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