Know Your Numbers: KPIs for EdTech Startups
While the country-wide lockdown spelled trouble for most Indian startups, there was one sector that benefited significantly from the shutting down of educational institutions – EdTech. The momentum was so great that it became 2020’s most funded sector within no time, with VC investments tripling in value between January to July 2020 compared to the previous year, from $310 Million to $998 Million.
Apart from the big guys who’ve stepped up their game further, many new EdTech startups have been born in the Covid era to match the enormous demand. Segments such as tutoring and test preparation, which attracted fewer investments in the past, have caught the attention of the masses and, in turn, investors.
Given this rapid growth, more and more entrepreneurs are looking to make a place for themselves in this industry. The best way to judge how well a startup is doing is by evaluating the industry-specific KPIs or Key Performance Indicators.
Key Performance Indicators are those fundamental quantifiable values that help ascertain a company’s performance over a period. Tracking KPIs is beneficial for both entrepreneurs and potential investors. Here are the important metrics to track for EdTech startups.
Monthly Run Rate (MRR)
The first indication of a company’s sound financial health is consistent revenue growth. Needless to say, the amount of money you are making is a critical number to track to get a sense of how well your product is being received in the market and if you are on the desired growth trajectory.
The monthly run rate, or MRR, is simply the revenue you generate in the course of a month. MRR is the easiest unit to break down your revenue into for strategizing purposes. You can also choose to keep track of your annual run rate (ARR), which can be derived from the MRR itself.
To calculate MRR, you need to know your Average Revenue Per User (ARPU) as well as the size of your current customer base. The formula is as follows:
MRR = ARPU (per month) x Number of Customers
To find the ARR, you can multiply the MRR by 12.
Monthly and Daily Active Users
The greatest validation for a startup comes from its customers. When you see them actively engaging with your product or service, it is clear that you have created something that fits their needs. A couple of good metrics that quantify this aspect are monthly active users (MAU) and daily active users (DAU).
An active user’s definition is not consistent, and startups tend to set their preferred benchmark for the same. However, it is generally said that an active user should be one that completes a pre-specified task on the platform, such as watch a video or click on an article. Counting only the number of logins may not be the best indicator of activity.
The relevant metric that can be derived from MAU and DAU is the stickiness ratio, which measures the number of customers that continue using the platform after the first time.
Stickiness Ratio = DAU / MAU
If the stickiness ratio comes out to be 0.5 or 50%, it means that in a 30-day month, customers used the app for 50% of the days, i.e., 15 days.
Customer Acquisition Cost (CAC)
In order to get a new customer, companies have to invest in advertising and marketing costs. This is all the more relevant in the case of early-stage startups when the market is yet to warm up to a new product or service.
The customer acquisition cost (CAC) measures the average amount of cash a startup burns in order to onboard a new customer. CAC’s optimum level varies depending on the market conditions, competitive landscape, and type of industry.
It can be calculated in the given manner:
CAC = Total Spend on Marketing and Sales / Number of New Customers Acquired
The CAC forms a part of the basic unit economics for a startup, which, if handled properly, make way for scalability and profitability.
Lifetime Value (LTV)
The other major component of unit economics is the lifetime value or LTV. The goal of every startup is to extract the maximum possible revenue out of its customers over time. The logic is straightforward- the longer the customers stay with a brand, the more valuable they will be for the company.
LTV measures the average revenue a customer brings in during the course of their relationship with the brand. The lifetime value is affected by multiple variables, including gross margins, product lifetime, and customer stickiness.
The formula for LTV is:
LTV = Average Customer Sale Value x Average Customer Lifespan
The best use of CAC and LTV is to use them together as a ratio. Typically, it is said that the LTV of a customer should be at least 3 times the cost it took to acquire him or her. This means that startups should target a CAC:LTV ratio that is greater than 1:3. Although it is no magic number for success, it is indicative of stability and profitability.
Customer Churn Rate
While most startups aim to build a loyal group of users, the truth is that it is quite hard to retain customers. The churn rate or rate of attrition measures the percentage of customers that a startup loses in a given period owing to different factors.
The startup is free to determine the period over which it seeks to determine its churn rate. Generally, churn is seen quarterly, semi-annually, or annually. The formula for the same is:
Customer Churn Rate = (Customers Lost in a Period / Total Customers at the Start of the Period) x 100
It is critical to monitor the churn rate and develop strategies to encourage customers to do business with the company for a longer time. As mentioned above, early-stage startups have to shell out a lot of money to acquire new customers. Plans must be in place to ensure that customers are retained as much as possible.
Bottomline
With the competition rising in the EdTech space and investors pitching in more money, KPIs like the above will be crucial in determining the deal flow. It is famously said that what cannot be measured cannot be improved upon, and it is quite true in the case of startups.
Tracking KPIs allows for internal evaluation and gives a bird’s eye view of the performance to potential investors.
