KPIs That Matter

Written by Lance Ellisor, Chief Operations Officer, Journyx, Inc.

In recent months, we’ve explored the growing importance of remote work, delving into its benefits, challenges, and best practices. Our comprehensive guide, An Executive’s Guide to Making Remote Work REALLY Work for Your Business, provided a deep dive into the strategies that can make remote work successful. Additionally, in Reflections on Managing a Remote Workforce, I shared personal insights on leading a distributed team, emphasizing the importance of outcome-based performance management.

These discussions have consistently highlighted a critical theme: the shift toward performance management based on key outcomes rather than traditional activity metrics. It’s clear that in today’s evolving work environment, the ability to measure and manage outcomes is more important than ever. With this in mind, we’re launching a new series of blog posts focused on the KPIs that drive success across different business functions.

The Power of Outcome-Based Performance Management

At the heart of this approach is the concept of KPI-based management. KPIs, or Key Performance Indicators, are quantifiable measures that gauge a company’s performance against its objectives. While many organizations are familiar with common KPIs, this series will survey important, yet sometimes overlooked, KPIs that can provide deeper insights into the health of your business.

In the coming weeks, we’ll explore these KPIs function by function, highlighting metrics that can help you better manage and optimize each area of your organization. Whether you’re focused on sales, services, product development, or IT support, understanding the right KPIs can make all the difference in achieving your business goals.

A Preview of What’s to Come

In this series, we’ll cover key business functions, each with its own unique set of KPIs that matter:

• Revenue Generation (Marketing & Sales): We’ll look at KPIs that are especially useful for driving growth, such as conversion rates, customer acquisition cost, and sales growth.
• Services: Here, the focus will be on KPIs to help your service teams deliver value to customers in a way that’s also optimal for your organization, including customer satisfaction and measures of productivity and profitability.
• Product Management & Engineering: We’ll explore metrics that measure product success and value efficiency, like product delivery timelines and customer adoption rates.
• Service Delivery (IT & Support): For IT and support functions, KPIs such as response times and issue resolution rates will be highlighted, linking these metrics back to overall company performance and customer satisfaction.

Each of these areas plays a vital role in your company’s success, and by understanding the right KPIs, you can drive improvements that align with your strategic objectives.

Functional-level metrics will all come in subsequent posts. First, let’s start with an overview of some company-wide KPIs that underpin the overall value of the company, as the KPIs of the functional areas will all tie in with these.

Key Performance Indicators That Drive Enterprise Value

In Eliyahu Goldratt’s seminal work The Goal (1984), the main character, Alex, ruminates on why his manufacturing plant is in danger of being shut down by the parent company. As he turns over in his mind why the plant is at risk despite having been operated so efficiently, something finally occurs to him, answering the question “What is the goal?” The answer is so painfully obvious that he hadn’t been able to see it: the goal of a company is to make money.

In broader terms, the goal of for-profit companies is to increase the value of the company such that it can be converted into much higher – usually geometrically higher – sums of capital. While the factors that drive enterprise value (EV) evolve over time and vary widely based on many things (macroeconomics, risk appetite of investors, market landscape, etc.), there are some core metrics that are virtually always fundamental to any valuation.

Each of the following KPIs usually plays a significant role in determining EV. Below, we explore these KPIs in detail, including how they contribute to EV, common methods for tracking and calculating them, and additional insights to guide your strategy.

1. Revenue Growth

Quite simply, revenue growth is the increase in a company’s sales or income over a specific period.

How Revenue Growth Contributes to Enterprise Value

Revenue growth is a direct driver of enterprise value, as it reflects a company’s ability to expand its market share, increase customer demand, and generate higher returns. Consistent revenue growth signals to investors and stakeholders that the company is successfully executing its strategies and is well-positioned for future expansion.

Revenue Growth Tracking and Calculation Methods

Revenue growth is typically tracked on a monthly, quarterly, or annual basis. The most common method to calculate revenue growth is by comparing revenue from the current period to the same period in the previous year. The formula is straightforward:

Revenue Growth (%) = (((Current Period Revenue – Previous Period Revenue)/Previous Period Revenue)) x 100

This calculation can be further refined by segmenting revenue sources, such as by product line or customer category, to gain deeper insights into what is driving growth.

2. Recurring revenue growth and ratio

Recurring revenue is the revenue that is predictable and likely to recur over time, such as subscription fees, maintenance contracts, or any other regular income streams (as opposed to one-time sales or transactions).

Here I am cheating and offering two metrics at once: recurring revenue growth and recurring revenue ratio.

• Recurring revenue growth measures the increase in recurring revenue over a specific period.
• Recurring revenue ratio is simply the ratio of recurring revenue to total revenue.

How Recurring Revenue Growth and Ratio Contribute to Enterprise Value

Investors prize recurring revenue streams because they reduce the reliance on incremental sales and customer acquisition costs and risks. In fact, in many industries (such as software), enterprise value is often expressed as a multiple of recurring revenue, as a type of shorthand for making comparisons between prospective capital investments. For these reasons, higher recurring revenue growth and a higher recurring revenue ratio will generally drive a higher premium on enterprise value.

Recurring Revenue Growth and Ratio Tracking and Calculation Methods

Recurring revenue growth is typically measured by taking a snapshot of all recurring revenue under contract at a point in time, and comparing it to a snapshot at another point in time (frequently annual or quarterly intervals):

Recurring Revenue Growth Rate (%) = ((Recurring Revenue at End of Period – Recurring Revenue at Start of Period)/Recurring Revenue at Start of Period) x 100

Recurring revenue ratio is easily calculated using this formula:

Recurring Revenue Ratio = Recurring Revenue/Total Revenue

3. Net Profit Margin

Net profit is the revenue remaining after all expenses, including taxes, interest, and operational costs, have been deducted. Companies often track this metric monthly or quarterly to monitor profitability trends.

How Net Profit Margin Contributes to Enterprise Value

In The Goal, when Alex realizes that the goal is to make money, he specifically notes that breaking even is not enough; making money means actually earning more than what is spent – a profit. Net profit margin is a critical indicator of a company’s ability to convert revenue into profit. A higher net profit margin, especially when sustained, typically leads to greater enterprise value, as it represents a key way that investors can expect to recoup their investment, and because it demonstrates operational efficiency and strong cost management, both of which are attractive indicators to investors.

Net Profit Margin Tracking and Calculation Methods

The net profit margin is calculated by dividing net profit by total revenue and then multiplying by 100 to express it as a percentage. The formula is:

Net Profit Margin (%) = (Net Profit/Total Revenue) x 100

4. Organizational Health Index (OHI)

The Organizational Health Index (OHI) is a metric developed by McKinsey & Company that assesses an organization’s ability to align, execute, and renew itself to sustain performance.

How OHI Contributes to Enterprise Value

A strong Organizational Health Index (OHI) indicates that a company is well-aligned, agile, and capable of sustaining high performance over time. Healthy organizations are better equipped to innovate, retain talent, and adapt to market changes, all of which contribute to long-term enterprise value.

Organizational Health Index Tracking and Calculation Methods

The OHI is calculated through surveys and diagnostic tools that measure various dimensions of organizational health, such as leadership, culture, and accountability. Companies using McKinsey’s OHI model can access detailed reports that benchmark their performance against industry peers. For more information, you can visit McKinsey’s Organizational Health Index page.

5. LTV:CAC Ratio

Normally considered primarily a Marketing metric, LTV:CAC is the ratio of Customer Lifetime Value (LTV) to Customer Acquisition Cost (CAC). I’m including it at the company-wide level because it is a powerful determinant of enterprise value.

How LTV:CAC Ratio Contributes to Enterprise Value

A high LTV:CAC ratio indicates that the company can acquire (is acquiring) customers efficiently and that these customers are contributing significant value over time. This efficiency underpins sustainable growth of the business and boosts profitability, both of which are especially material to EV.

LTV:CAC Tracking and Calculation Methods

• LTV is calculated by multiplying the average purchase value by the number of times the customer buys per year and by the average customer lifespan in years.
• CAC is calculated by dividing the total costs associated with acquiring customers (e.g., marketing and sales expenses) by the number of new customers acquired during a specific period.

The LTV:CAC ratio is then calculated as:

LTV:CAC Ratio = Customer Lifetime Value (LTV)/Customer Acquisition Cost (CAC)

Norms and Heuristics

Unlike many metrics, it’s not necessarily the case that “higher is better” when it comes to this one. A common heuristic is that an LTV:CAC ratio of 3:1 is ideal, meaning the lifetime value of a customer should be at least three times the cost of acquiring them. A ratio below 1:1 indicates that customer acquisition is not profitable, which is a red flag for investors. A very high ratio (e.g. 9:1) suggests that the company may not be investing enough in customer acquisition (perhaps because it lacks the free cash to do so), which represents a significant opportunity for an investor. For more insights on LTV:CAC, you can refer to authoritative resources such as HubSpot’s guide on LTV:CAC ratio.

6. Net Promoter Score (NPS)

Net Promoter Score (NPS) is so commonly used that it’s safe to assume you are aware of it. It’s a metric of customer loyalty or enthusiasm, based on a single question to customers to rate the likelihood that they would recommend your company, product, or a service to a friend or colleague.

How NPS Contributes to Enterprise Value

A high NPS signifies strong customer loyalty; loyal customers are more likely to make repeat purchases, refer others, and resist competitive offers, all of which contribute to retention, sustained revenue growth, and profitability.

Net Promoter Score Tracking and Calculation Methods

NPS is calculated by asking customers a single question: “On a scale of 0 to 10, how likely are you to recommend our product/service to a friend or colleague?” Respondents are categorized as Promoters (9-10), Passives (7-8), or Detractors (0-6). The NPS is then calculated by subtracting the percentage of Detractors from the percentage of Promoters. The formula is:

Net Promoter Score = % of Promoters – % of Detractors

Background

NPS was introduced by Fred Reichheld in a 2003 Harvard Business Review article titled “The One Number You Need to Grow.” It has since become a widely used metric for gauging customer satisfaction. One of the key advantages of measuring your organization’s customer experience with NPS is the ample benchmarking data that comes from employing this standard, simple metric. For more background on NPS, you might review this overview from SurveyMonkey and read Reichheld’s original HBR article.

7. Net Retention Rate

Net retention is a measure of how well a company retains and grows (through upselling and cross-selling) the revenue from its customer base. It’s most relevant for organizations who employ a recurring revenue model (subscription, annual licensing, membership, usage fees, etc.).

How Net Retention Rate Contributes to Enterprise Value

Net Retention Rate is a critical metric for investors in part because it’s a strong indicator of the business’s stability and future growth potential. A high net retention rate demonstrates that the company is not only retaining customers but also successfully upselling or cross-selling additional products or services to them. A healthy, growing recurring revenue stream is highly valued by investors as it suggests predictable, sustainable cash flows. Companies with high net retention rates often earn a premium EV because they are seen as less risky investments.

Moreover, companies with high net retention rates rely less on acquiring new customers to drive growth. Instead, they’re able to grow revenue without proportionally increasing costs (growing existing accounts typically means low customer acquisition costs, CAC). Obviously, this leads to higher profit margins and makes the company more attractive to investors.

Net Retention Rate  Tracking and Calculation Methods

Net retention rate is calculated by taking the total revenue from existing customers at the start of a period, adding revenue gained through expansion, subtracting revenue lost through churn and downgrades, and then dividing by the total revenue at the start of the period. The formula is:

Net Retention Rate (%) = ((Starting Revenue + Expansion Revenue – Churned Revenue)/Starting Revenue) x 100

Norms and Heuristics

Net Retention Rate is a powerful indicator of a company’s ability to generate revenue from its existing customer base, and different industries have varying expectations for what constitutes a “good” rate. However, there are general benchmarks that are widely accepted:

• Above 120%: Companies who can achieve a Net Retention Rate of over 120% are likely going to enjoy a super-premium Enterprise Value, perhaps in the range of 20x revenue, as this level of retention indicates strong customer loyalty and the ability to drive organic growth without relying heavily on new customer acquisition.¹
• 100% – 120%: A Net Retention Rate above 100% is considered excellent. This means that the company can achieve growth without acquiring new customers. The reliability of this revenue stream commands a premium EV.
• 90% – 100%: A Net Retention Rate in this range is still strong, indicating that the company retains most of its revenue from existing customers, with minimal churn. While not as impressive as rates above 100%, companies with Net Retention Rates in this range are still seen as stable and reliable, particularly in industries with lower revenue expansion opportunities.
• Below 90%: A Net Retention Rate below 90% is a red flag for investors. It suggests that the company is losing too much revenue through customer churn, which may indicate issues with customer satisfaction or product-market fit. Companies with Net Retention Rates below this threshold may need to invest more in customer retention strategies or face challenges in sustaining growth.

These benchmarks help investors assess the health and future prospects of a company. A strong Net Retention Rate, especially above 100%, can significantly enhance enterprise value by signaling that the company is effectively growing its revenue base in a cost-efficient manner.

Conclusion: Laying the Foundation for Success

Understanding and optimizing the right KPIs is essential for driving enterprise value and ensuring long-term business success. Revenue growth, recurring revenue growth and ratio, net profit margin, organizational health, LTV:CAC ratio, NPS, and net retention rate are all key indicators that provide a reasonably comprehensive view of your company’s performance and potential for growth.

In the next post, we’ll take a closer look at the revenue side of the business, focusing on marketing and sales KPIs that can accelerate growth and enhance customer acquisition strategies. By mastering these metrics, you’ll be better positioned to lead your business to new heights and increase its enterprise value.

Stay tuned for the next installment in this series, where we’ll continue to explore the KPIs that matter most.

¹ Source: McKinsey analysis of 40 public B2B SaaS companies shows that those with NRR of 120 percent or more also have higher multiples—with a median EV/revenue of 21-fold compared with ninefold for those below the 120 percent mark.