Business Metrics: Essential Measurements To Keep You Moving Forward
While many businesses will have no trouble building a range of products or services and nurturing a core group of customers; growing and taking their business to the next level can be a lot more challenging. This is because with a lot more going on including more customers and staff, a business can no longer just depend on its gut feel, but instead requires concrete data to analyse how well it’s performing, set future forecasts and goals and help to increase its growth.
Ongoing improvement is the key to this. Yet you can’t improve what you can’t measure. This is where the importance of business metrics comes into play including those that involve getting feedback from your customers and employees.
Key metrics that a business should consider
When your business starts growing, if you’re to sustain your momentum you need to be able to measure the effects of your actions including any money or resources you’ve invested. After all, this is the only way you’ll know where you’re doing well and what you need to improve, which becomes even more important the larger you become.
So, with that in mind, here are some key metrics you should consider using if you’re to maintain and improve your growth moving forward.
As a minimum the very first metric you should be tracking and measuring is the money that your company is generating over a given period of time.
Essentially your sales are defined as the income from customer purchases of goods and services, minus the cost associated with things like returned or undeliverable merchandise. Sales data also needs to be correlated against advertising campaigns, price changes, seasonal forces, competitive actions and other costs of sales.
If you have multiple product or service lines, you should be tracking the revenues for each of these, that way you will know which individual lines are profitable and those that need improving to make them perform better. In addition, you need to be collecting and measuring your data cyclically – monthly and more – if you’re assess how well your business is growing.
Once you’ve done your calculations, the higher the metric value you’re left with, the better.
Next, you’ll want to look at your gross margin, which is concerned with the amount of money you have left after deducting the costs associated with obtaining that income.
Tracking margins is important for a growing company, since increased volumes should improve efficiency and lower the cost per unit (increases the margin). Improving productivity requires a lot of time and effort, and many companies charge ahead without realising, which direction their margins are going, which can be bad if it’s going backwards.
However, you can save yourself a lot of trouble with this simple calculation:
Gross margin = Revenues – Costs
Again, after you’ve done your calculations, the higher the metric value you’re left with, the better.
Monthly profit or loss
When it comes to your profits, we’re not just simply talking about the difference between the costs of your product or service and the price being charged for it. Instead, your calculation needs to include all your fixed and variable operational costs that are paid regularly each month. These include such items as rent or mortgage payments, utilities, insurance, taxes, and the salary that you and your partners may not be taking just yet.
Beyond operational costs, the biggest determinant of profit is typically the price you charge for your product or service. This amount you charge, over the base cost of an item, is called “the markup,” and the difference between cost and price is the “margin.” Any company with margins below 60% will likely have a tough time growing.
Your business is nothing without customers and your future success is just as dependent on the loyalty and future sales of your existing customers, as it is sales from new customers.
Loyal customers are also more likely to recommend your business to others. And with no better recommendation than a personal one made by your own customers; this is a key revenue stream in helping you grow, which you should monitor and nurture.
The good news is that there are some metrics to help you with this with the best of them including.
Customer satisfaction score (CSAT)
One of the simplest and commonly used ways to gauge customer sentiment and in particular the happiness of your customers is to use the CSAT metric.
It’s quick and simple to calculate based on a question such as the following.
"How satisfied were you with your latest service experience?"
Respondents are required to rate their satisfaction with what they’ve been asked on a scale of 1 – 5, where 1 indicates them being “very dissatisfied” and 5 represents “very satisfied”.
Following this you’ll need to add up all the responses where you’ve been rated a 4 or 5 and divide these by your total number of responses to get your overall CSAT score, which should sit something between zero and 100.
For a quicker and more convenient way of measuring your customer satisfaction levels, you might like to try our CSAT calculator.
Net Promoter Score (NPS)
Following this, the next and probably the most recognisable customer loyalty metrics is the net promoter score (NPS). This metric is ideal when you want to measure customer satisfaction and predict how the impact of customer loyalty and advocacy will affect your future growth.
You can measure your NPS score by asking your customers the following question.
“On a scale from 0 to 10, how likely would you be to recommend our product/service/company to a friend or colleague?” where scores between (0-6) are your NPS detractors, scores between (7-8) NPS passives and scores between (9-10) your NPS promoters.
You can then calculate your NPS using the following net promoter score formula, which helps you work out the difference between your proportion of promoters and detractors and generate a score of between -100 and 100.
However, it’s possible to calculate a relatively small dataset by simply subtracting your number of detractors from your number of promoters. This should leave you with a positive or negative number, that you would then need to divide by your total number of survey responses and multiply by 100.
The number you’re left with, when rounded to the nearest whole number, should be between 100 and –100. The higher your score the more desirable it is.
For a faster and simpler way of working out your NPS, you might like to try our NPS calculator.
Closely linked to your customer loyalty and another key indicator of how well your business is performing is to see how good you are at retaining customers, which the customer retention rate (CRR) metric can help you with.
The CRR metric is concerned with measuring the number of customers a company retains over a given period of time, which is expressed as a percentage of that company’s existing customers who remain loyal within that time frame.
It’s a valuable metric to use, as the more loyal customers you can nurture, the more referrals and positive feedback you’re likely to get about your products and services.
You can calculate your customer retention rate with the following steps:
- Take the number of customers at the end of your selected time frame and subtract the number of customers gained within that time frame
- Divide your resultant figure by the number of customers at the beginning of the period
- Multiply by 100 to get a percentage
CRR = ((CE – CA) ÷ CS) x 100
*CE = customers at the end of the period
*CA = customers acquired during the period
* CS = customers at the start of the period
Customer acquisition costs
As well as trying to retain more customers, you’ll want to acquire a growing rate of new customers. However, there are costs involved in doing this, so in order to remain competitive you’ll want these costs to trend downwards as your business grows.
The customer acquisition cost (CAC) metric also known as cost per acquisition (CPA), is the perfect metric to help you, as it helps measure the cost incurred by a business to attract and acquire a new customer. These costs include all the money you spend through your sales and marketing teams in areas such as advertising, as well as other essential costs such as staffing, and anything you spend to manufacture, produce, store and ship your products.
The CAC can also provide a useful measure of a company’s growth, as it shows how many new customers have been added.
To calculate your CAC, you’ll have to add up all the costs that were incurred to acquire a new customer (marketing, advertising, sales, salaries, etc) and divide this total cost by the total number of customers acquired.
CAC = total costs ÷ total number of acquired customers
Once you have worked out the vital figure, you can then check it again the industry norms for your type of business, so you can see how competitive it is.
Lifetime customer value
Having worked on your cost to acquire customers, you’ll also want to know how much income your business is likely to generate from a typical customer for as long as that account remains a customer. This can be particularly useful in terms of future planning and investment.
The customer lifetime value (CLV) metric is ideal for working out this crucial figure.
To calculate your CLV rate, you simply need to work out your average customer purchase value, and then multiply this by your average number of customer purchases, before multiplying this by your average customer lifespan.
For example, if the average value of a customer purchase is £50, the average number of purchases is 4, and the average customer lifespan is 4 years, the CLV would be:
CLV = £50 x 4 x 4 = £800
Returning to more business-related metrics, it’s important not to forget about your overhead costs. These are the fixed costs that you must pay such as salaries, rents and other bills that are not dependent on the level of goods or services that your company produces.
When your business is growing, these costs can quickly creep up and get out of control if you’re not tracking them carefully.
Consequently, if you can track them month to month, you’ll have a clearer idea about the biggest areas of spending in your business. This will allow you to plan more effectively moving forward and see where you can save money if it’s required, such as renting a new premises or switching your utility or broadband supplier.
While it’s fair to say your business is nothing without its customers, you also won’t stay in business very long if you don’t have staff to service those customers.
So last but not least, the ability to assess your employee’s contentment, loyalty and willingness to recommend you to others is extremely valuable in terms of helping you gauge their likelihood to stay with your business, as well as attract fresh talent to it. This is really important, as both helps you to grow your business.
Fortunately, you can quickly get the measure of how many loyal staff you have by using the eNPS (employee network promoter) score metric.
You can measure your eNPS by asking your staff the following question.
"On a scale of zero to ten, how likely would you be to recommend our company to others as a great place to work?"
(this is based on the proviso that those closest to zero would be the least likely and those closer to ten the most likely to promote you)
Having collected and reviewed their answers, you can then divide your employees into the following groups:
- Promoters – Those who rated you a nine or ten are considered your promoters and can offer you valuable insights on what your company is doing right.
- Passives – Staff responding with a seven or an eight are categorised as passives. They don’t feel strongly about your company either way. Subsequently, you should be looking to convert these employees into promoters and prevent them from becoming detractors.
- Detractors – Those rating you between zero and six are referred to as detractors. These people are unhappy with their job and are more likely to leave your company. However, detractors are still useful, as they can tell you a lot about what you should improve.
To calculate your eNPS, you’ll have to subtract your percentage of detractors from your percentage of promoters, or for a simpler way of working out this figure try our eNPS calculator.
You should now be left with a score of between –100 and 100. Any positive score is considered good, while anything below zero should serve as a warning sign that you need to improve employee satisfaction and your wider employee experience.
We hope you found this blog interesting and if you weren’t already familiar with all the points outlined, you’ll have some useful bits you can take away and maybe incorporate within your own business.
What you will have learnt however, is that as well as the more business focused metrics, you need to address customer and employee metrics too. After all, these two audiences are critical to your business success, so you need to see how well you’re meeting their needs and where you need to improve.
The key thing to remember is that if you can’t measure it, you can’t improve it. So, the more areas of your business you’re able to track and measure, the better, as the more you’ll be able to improve and plan for moving forward. And ultimately your business should be more successful as a result of this.