Ah, business metrics. Analysts are constantly trying to come up with the next new ace-in-the-hole for understanding your business practices perfectly, and how to keep from ever making a mistake. The truth is we can’t stop ourselves from errors in our business practices at every turn—but we can learn from them, and how to prevent them going forward.
It involves several metrics that are time-tested and truly useful. You have to look across a broad spectrum of possibilities for where you could be falling short in your strategy and operations. It’s not always going to be glaringly obvious where you’re falling short—but there are plenty of ways to sniff it out.
Here are seven metrics that are essential to finding those holes. Make sure that you stay on top of each of them, as they’ll help you sharpen your skills of owning and running a business as a whole.
Not only will they help you to find the week spots, but also to ideate and execute new ways of doing what you do best. Refining is an incredibly necessary part of running a great company. If you can use these to that end, you’ll be ahead of the pack much more than you know.
Cost of Acquisition
Customer Acquisition Cost (CAC) is invaluable. It helps you to understand where are exactly your marketing dollars are going, and how exactly they’re helping you.
The model for this is simple: you take how much you’re spending on different acquisition tactics—various marketing efforts, etc.—and then match that with how many customers you’re acquiring over a given time. This article is extremely helpful in breaking down some of the finer details.
This can show you when the best times to find and acquire customers are, teach you about trends for your target market, and help you to find where you’re wasting money. It’s an essential place to start in your analytical efforts.
Lifetime Value of a Customer
Lifetime value is the other side of CAC, which will ultimately help you to shape how and why you’re marketing to your base. The lifetime value takes your understanding of CAC and pairs that with how much that customers is going to make you over the course of their relationship with your company.
Once you understand how much you can generally profit from a customer, you can go back and create a spending limit on acquisitions. If the two simply aren’t matching up, then it will be clear that you need to revamp your plan for acquiring and retaining customers.
Customer Retention (Churn Rate)
The churn rate of a customer is especially useful when you’re in the SaaS industry, but is really something that we can all learn from doing commerce in 2015.
In the world of subscriptions, services and memberships, churn rate can be extremely complicated, and totally unclear as to how to measure. We won’t give you the entire explanation here, but the idea is that you want to find (generally) a month-to-month turnover rate of your customers—and what that means for your revenue.
It could be that you have a higher churn rate during certain seasons, which might mean ramping up your acquisition efforts. In other cases, you may simply need to reevaluate the way that your service is set up, and how it can influence the way that you retain your customers.
This is a little bit simpler than some of the other metrics, but there are myriad ways to go about it. If your office isn’t being productive, then you’re obviously going to be losing money. If one branch of your company is especially productive, how can you transfer that to other areas?
It’s not always as easy to measure productivity as CRM and ERP guys would like. Creatives have their own way of being productive just like the HR department has its own ideas. Your goal is to get a sense of how each is doing relative to their process, and then problem solve.
It’s simple: how much new money is your Sales team generating? If you’re not producing at a rate that is conducive to growth, or conducive to the costs of running your business, then they are underperforming—and something needs to change.
Sales is the backbone of everything you do, and so if your team isn’t producing properly, it doesn’t just mean a decrease in numbers: it can be a threat to the entire functionality of your company. Without sales, fulfillment is just staving off an inevitable crash.
Gross margin is a more concentrated metric concerning your sales revenue. It asks, “How much are we retaining after the costs of fulfillment?” This can be measured in a simple ratio or percentage. It’s an extremely straightforward way to get at the meat and potatoes of what you’re doing as a company.
If you have a small margin, then you’re inherently preventing growth. It doesn’t leave room for your to expand your efforts, and requires you to tighten up before you move forward.
Profit margin, even more so than gross margin, considers all of the costs that go into running your business. How much is our office lease costing us? Where are company expenses month to month hurting us?
It’s essential to ask yourself questions about overhead. Today more than ever, business owners are tasked with creating a culture that makes their company appealing to fresh young hires. Take a hard look at how your culture money is hurting or helping you—and contributing to your overall profit.
Running a profitable business is time consuming, and harder than most would expect. But if you’re in constant care of these metrics, and asking yourself the right questions, you’ll be charting a course for a business that knows how to really succeed.