While I am not a fan of over analysis, I do think that all owners need to know certain business metrics. These will help guide strategies and assist you as leaders to develop your business and take it to the next stage.
At the very least, they help you make a decent income.
So, what are the five business metrics you need to know, and why?
1. Profit Margins
This is an important metric I think that some business owners forget about. It is easy to look at the overall profit and loss account and determine how healthy your accounts are. It is another thing to go deeper and see how individual campaigns are performing and helping your brand.
Without your profit margins, you won’t know if marketing campaigns are costing you too much and if you aren’t generating any profit.
Take for example a Google Ads campaign. The average profit margin for a product can be very low; some industries can only manage a margin of 7-9% though some can achieve 50%. The UK average online purchase in 2015 was £55.76. If the average cost per conversion on Google was £35.39, then an average campaign would record a loss of between £7.51 and £31.49 per transaction.
2. Customer Retention
Of course, the customer acquisition cost can be spread over the customer lifetime value. Therefore, while one transaction via Google Adverts might not make a profit, further transactions might.
The trouble is, you need to know how many customers are returning to your brand once they’ve bought your product. Remember it is always easier and cheaper to sell to an existing customer than a new one. And there are several ways you can achieve this:
- Email marketing.
- Targeted, direct marketing.
- Personal networking.
These are important as they are often less costly and more successful.
The customer retention can also tell you the level of service you are providing to customers. If your retention is too low, then you need to look at improving your customer service.
3. Customer Lifetime Value
So, you know how much you make per product sold and the customer retention. Now you need to know the customer lifetime value. There are numerous ways you can calculate your customer’s lifetime value and these don’t always agree. Therefore, it is best to take an average.
The average customer lifetime value can give you a better insight into how much a customer spends with your brand over time. It also gives you a better understanding of roughly the amount you should really spend on acquiring customers.
While you might make a loss on the first transaction; if their potential lifetime value is significantly more than the amount spent on one transaction, then you can justify your spending.
This business metric is often forgotten about. While people concentrate on how much they earn over a year or month – many small businesses don’t consider how much their time is worth. This should be worked out on an hourly basis.
For this, you need to know your profit over the whole year and the number of hours worked. If, for instance, you made £100,000 over the last 12 months with an average profit margin of 30% and you worked 60 hours per week – you’d earning just £9.62 per hour.
If the value you get is less than what you want, then you need to look at adjusting your pricing strategy or your costs.
5. Customer Acquisition Cost
Now it comes to estimate the customer acquisition cost. It is important to note it isn’t just the amount of money that is spent on marketing materials and programmes. The time you spend on marketing projects is also a cost to the business, but an invisible one.
So, if you spend five hours a week organising marketing campaigns, and you earn £10 per hour, that is an additional £50 per week you are spending on marketing. That could equate to £2600 per year in lost revenue.
If that time was spent on production, that could provide you with a pay rise.
What Can You Do With These Business Metrics?
These five key business metrics will help you reform your business and strategically plan for the next stage in your career. There are several directions you can take to increase the most important statistic on the list: your rate of pay. These can be summarised as:
Lower Costs To Produce Product: The cheaper it is to produce and deliver your product, the higher your profit margins will be. This will directly affect your Time-Value.
Improve Customer Service: The more customers you can entice to return to your business to make further purchases, the better your customer lifetime value. This can help increase revenue and therefore profits.
Raise Prices: Generally, if you have a good customer service, raising your prices will have a limited impact on your customer retention. Yet raising prices will increase profit margins and your time-value.
Cut Services: While Google can help grow some businesses, for others it is not the right advertisement platform. Generally, I would say that businesses who can offer clients lots of products over an extended period can make use of Google. Others, who sell just one or two products once will be limited in the success they can achieve.
Outsource: Sometimes your time could be better spent managing your productivity or delivering your product. Therefore, don’t do the marketing yourself, instead, outsource your marketing to a professional who will usually cost less than the time-value you have set yourself. Accountants also look for ways to return to you more money than they cost.
These five business metrics are an important part of your career. They can help define your success or failure and help guide you to the best decision. They can also support your organisation with help to attract inward investment.
Do you use all these business metrics in your business? How would you improve one of these business metrics?
Let us know in the comments below.