Entrepreneurs find it easier to build a product and find those first important customers than to take their startup to the next level. Are you struggling with that too?
If yes, don’t worry. This post is just for you. We will show you how to take your startup or new business to the next level.
What you need are tools that can help you collect, collate, and analyze important business measurements — aka metrics. With the right kind of business metrics, you will find it easier to monitor things and grow fast.
Here are top eight metrics that everysuccessful business monitors all the time, but many new entrepreneurs only track only occasionally (if at all):
1. Sales Revenue
In simplest terms, Sales is defined as the income generated from the purchase of your services or goods minus the total cost of things such as undeliverable or returned merchandise. Needless to say, everyone is excited when this number is growing, hence the importance of regularly calculating and monitoring your weekly, monthly, quarterly and yearly revenue growth rate. However, it is important that you constantly mine additional sales data to establish deeper trends.
You need to correlate sales data to price changes, advertising campaigns, competitive actions, other cost of sales, and seasonal parameters. There are many advanced metrics when it comes to analyzing sales trends — such as Return on Sales, Asset Turnover Ratio, and Revenue per Head — which can shed light on how your business’s performance measures up against competition. These metrics can tell you how you’ll perform vis-à-vis your competitors in the long run — whether your business will survive and thrive or wither away.
2. Customer Loyalty and Retention
In a nutshell, customer loyalty involves attracting the right kind of customers, having them buy your products and services (preferably, in large quantities), getting them to give you repeat business, and inspiring them to spread a good word about your business. According to a research by Bain & Company and the Harvard Business School, a 5% improvement in customer satisfaction can boost profits by 25% to 95%.
So how does one build customer loyalty?
There’s no shortcut or magic trick. If you want your customers to be loyal, treat them exactly the way they would like to be treated. Yup, it’s that simple.
When it comes to measuring customer loyalty and retention, there are two methods:
Direct feedback at the time of purchase – Customer feedback can help you improve your products or services, measure customer satisfaction, show that you value your customers’ opinions, create the best customer experience and improve customer retention. Knowing how your customers feel about your brand can help you adjust your business to better fit their needs and establish a stronger relationship with them.
Customer surveys – A customer satisfaction survey is an excellent tool to gain insight on customers’ requirements and expectations. A thorough analysis of this data can help you develop strategies to improve customer experience, customer retention rate, customer loyalty, brand image, and sales revenue.
While these two methods are highly effective, to get benefit from them you must implement them in a systematic manner, rather than in an ad-hoc way. Both the tools can help you retain more customers and take your business to the next level.
Now how do you calculate your customer retention rate? Well, a simple formula is the following:
[(E-D)/S]x100
Where:
E is the number of customers at the end of the period
D is the number of customers acquired during the period
And S is the number of customers at the start of the period
3. Customer Acquisition Cost
A business’s customer acquisition cost (or CAC for short) is the total sales and marketing cost required to turn a lead into a customer.
Your sales and marketing expenditure includes:
– Money spent on marketing
– Salaries paid to salesmen
– Bonuses
– Commissions
– Other expenditure linked with gaining new leads and turning them into your customers
Customer acquisition cost is an important metric to measure because it is an indicator of the effectiveness of your sales and marketing programs. It compares the total money spend to attract new customers vis-à-vis total number of customers gained in a specific time period.
Successful companies aim to consistently lower the cost of acquiring new customers — and understandably so. The lower the customer acquisition cost, the higher the profit. A lower customer acquisition cost also indicates that you are spending money efficiently.
For instance, if your inbound marketing strategy is producing great results, you won’t have to spend a lot on ads to gather poor-fit leads. Similarly, if your blog posts are bringing a lot of organic traffic that has a high conversion rate, you won’t need to spend a huge chunk of your digital marketing budget on a pay per click ad campaign.
Likewise, if your current sales team is able to bring a healthy number of new customers in the fold, you don’t need to expand the team by recruiting new salespersons to meet your monthly target.
Furthermore, if your customer service team is able to cultivate strong relationships with customers and keep them happy, these customers will in turn generate new leads by writing reviews and testimonials and telling others in their circles about your business.
If you’re able to turn these prospects into customers, you’ve gained them without spending anything on marketing. As a result, your overall customer acquisition cost will come down even further.
The long and short of it is that every business should aim to bring down its CAC. However, to be able to do that, it’s important that you measure CAC regularly.
So how is CAC measured?
Here’s the formula:
Customer Acquisition Cost = Money spent on Sales and Marketing/Total number of customers acquired
Before you sit down to calculate your CAC, it’s important to define the time period for which you’re evaluating it — that is, monthly, quarterly, or yearly. This not only allows you to narrow down the scope of the data, but it also makes it easier for you to compare your CAC over a period of time.
Once you’ve defined the time period, divide your sales and marketing costs for that time period by the total of number of customers acquired. This result will be your CAC for that time period.
For instance, let’s say you want to calculate your CAC for the first quarter. During this time, you spend $100,000 on sales and marketing and acquired 200 customers. So, your CAC for the first quarter is $500.
Comparing the last quarter’s CAC against previous quarters’ and other important business metrics will give you key insights about your sales, marketing and customer service campaigns.
4. Operating Productivity
Do you know how well or badly your staff is performing?
If not, operation productivity is the metric you may want to be looking at.
Unhappy staff can spell trouble with the capital T. If you’re not aware of the little issues that are bothering your workers, over time these workplace issues can brew into something big and negatively affect all other aspects of your business. On the other hand, happy staff delivering high productivity can be your greatest strength, allowing you to take on new challenges with confidence.
You can apply the productivity ratios to all aspects of your business. It works by dividing the amount of output by the amount of input during a certain period of time. Labor productivity, for example, can be computed by dividing the actual number of goods and services produced by the total number of hours worked by your labor during a certain period. For instance, if your company produced 10,000 units last quarter and the total number of hours worked was 2,000 hours, the productivity is 5. This implies that your labor produced 5 units per hour last quarter.
You can apply the same process to evaluate marketing productivity, support productivity, or sales productivity.
5. Gross Margin
Gross margin is another key metric that you should never ignore. Expressed in percentage, it sheds light on the efficiency of your company’s sales and production team.
So how is gross margin calculated?
First, calculate your business’s total sales revenue. Next, subtract the cost of goods sold. Finally, divide this figure by the total sales revenue.
Here’s the formula:
Gross Margin = ((Revenue – The Cost of Items Sold) ÷ Revenue) X 100
For instance, let’s assume your company’s net sales for the last quarter was $25 million, while the total cost of items sold was $20 million.
So, your gross profit margin is: ((25M – 20M) ÷25M) X 100 = 20%
As you can see, you would want your gross margin to continuously improve. For growing businesses, it is crucial to track gross margins. This is because increased volume should boost efficiency and reduce the cost per item.
If your margins are moving south even when productivity is improving, it means something is not right and you should address it without delay.
6. Monthly Net Profit (or Loss)
There’s more to calculating your monthly profit than subtracting the selling price by the cost of the product. You must also include fixed as well as variable costs of operation that you pay every month. This includes, but is not limited to, the following:
– Mortgage or rent payments
– Salaries
– Insurance
– Utilities
After subtracting these cost items, you arrive at the net profit or loss. This figure determines if you made or lost money during a particular month. Of course, the main purpose to do business is to ultimately turn a profit. But this is rarely the case when your company is new. It is normal for young ventures to lose money in the early months or years before they break-even and turn a positive bottom-line.
Therefore, you should also monitor the Net Profit margin which is computed by diving the Net Profit for the period by the Revenue figure. The higher this ratio, the greater the value your business is creating.
7. Overhead Costs
Fixed costs fall into this category. That is, costs that do not depend on things like how many items you are producing or selling. For instance, rent and fixed salaries you pay every month are overhead costs. It is important that as a growing business, you calculate and closely monitor your overhead costs, since they can creep up steeply if you don’t control them.
Tracking them allows you to see where you’re spending the money. Since overhead costs usually don’t depend on how much net revenue you earn or how fast your business grows, you should calculate it separately. If your overhead cost is high, find ways to bring it down, such as switching to a more cost-effective supplier or moving to a cheaper location. That’s because high overhead cost means lower net profit margins, which won’t help your cause when you’re aiming to take your business to the next level.
8. Variable Cost Percentage
There are two components that make up your total cost. One is the fixed cost, and the other variable cost. As the name suggests, variable costs are those that change according to your business activity. For instance, the cost of items sold is an example of variable cost. Other examples include raw materials cost, shipping expenses, and direct labor cost.
As your volume grows, the variable cost should come down thanks to economies of scale. Tracking this metric tells you whether that’s happening or not. Another benefit of tracking it is that it shows whether various variable costs you’re incurring are consistent with competitive offerings and industry norms.
If variable costs increase, that’s bad news. That means your company won’t grow, even if your total number of customers are increasing and sales are up.
Final Words
It takes more than a great product or service and a highly motivated team to turn a business idea into a sustainable company. While no one denies the importance of having these two things, if you want your business to grow, you must monitor these eight business metrics on a constant basis.
They tell you which direction you are heading to and give you a great chance to fix issues before they jeopardize your business.
