In today’s tech-savvy world, access to more data redefines how large and small businesses implement strategies, track performance, and collect data. With more organizations going digital, the need to select key metrics to make efficient business decisions grows.
If your business tracks only one metric, you cost your performance and sales. A combination of metrics is necessary to gauge your company’s value truly. We’ll help you learn everything about metrics.
What Is KPI?
Key Performance Indicators are measurable values to demonstrate how effectively and efficiently your company achieves key business objectives. KPIs are quantifiable measures to judge your business’s performance level and value.
There are over a hundred KPIs because various businesses have different processes. High-level KPIs focus on your business’ performance, whereas low-level ones track processes across your sales, marketing, customer support, and HR departments.
What Are the Different Types of Metrics?
Metrics are of two primary types:
- Operational Metrics – These metrics allow businesses to track service, sales, marketing, and HR performance. It includes turnaround time, production time, number of defects, etc. Operational metrics help people identify where the discrepancy in operations arises from;
- Financial Metrics – These metrics judge a company’s ability to convert operational metrics into financial goals. It includes profitability ratio, ROI, sales figure comparison, etc.
What Are Conversions?
Conversions occur when a website visitor completes a desired goal that is profitable for the website owner, like filling out a form, downloading an ebook, or purchasing.
For users to execute the desired action, your page’s design, copy, and usability elements must work together to create an unparalleled user experience. The total number of visitors that convert to your website contributes to your conversion rate.
Conversions may vary depending on your website’s or business goals. It includes:
- Leads;
- Email Signups;
- Filling Forms;
- Online Sales;
- Calling a Given Number;
- Downloading a Resource;
- Engaging with the Site (visiting a specific page, time on visits, etc.)
Related article: Conversion Rate Optimization (CRO) Guide
Why Are Metrics Important
Tracking metrics that matter the most to your organization maximize your business’s efficiency and chances of success. Furthermore, defining and analyzing key metrics allows you to:
- Drive the Strategy and Direction of Your Company;
- Identify Objectives for a Certain Organization or Department;
- Make Strategic Business Decisions;
- Driver Performance;
- Change and Evolve with the Organization;
- Ensure Internal and External Public Relations.
Let’s discuss these benefits in detail:
Allows You to Make the Process Objective
Businesses design their processes as per the customers to meet their unique needs. Implementing the ideal metrics allow you to transform your client’s vague requirements into valuable numbers that you can track to ensure efficiency.
Furthermore, metrics enable us to map the process to identify whether it is good enough to meet the customer’s requirements.
Drives Business Execution
Keeping your KPI scores up-to-date and discussing them at weekly team meetings ensures consistency of performance and outcomes. In addition, without measuring the right metrics allows, your weekly and 1-on-1 meetings won’t be effective.
Facilitates Alignment
Defining the right business metrics and ensuring everyone in the organization understands them ensures the entire business works towards the same organizational goals. That way, you can increase your business’s efficiency and maximize success.
Helps You Meet Your Improvement Goals
The best way to make improvement goals objective is to measure them in terms of numbers. Using words like ‘Good Quality,‘ ‘Needs Improvement,’ or ‘Acceptable Quality‘ are vague and vary depending on their usage.
Thus, metrics help you transform customer requirements and operational performance into numbers. As a result, you can compare them to identify whether your business is meeting customers’ needs.
Enables You to Identify Business Performance
Tracking key business metrics tells you how your business is performing and allows you to determine which areas require attention. What’s more, it provides direction for ways to improve operations and make well-informed decisions.
Allows You to Execute Comparative Analysis
Measuring your business’s key metrics reveals your organization is under- or overperforming. It also helps you determine which people and departments aren’t performing well and require support.
Facilitates Communication Across the Organization
Analyzing business metrics improves communication between your organization and customers, employees, shareholders, and the overall society.
What Metrics Should My Business Be Using?
Choosing the vital, most valuable metrics for your business can be tricky, especially since there are many metrics to choose from. Since every business has varying processes, the metrics that matter will also vary. However, there are four questions that every organization can use to identify the right metrics:
- Is the metric relevant to the performance of the business?
- Does the metric allow you to predict future performance in a practical and valuable way?
- Can you measure the metrics?
- Can business teams associated with metrics impact it?
Step-by-Step Guide to Implementing the Right Metrics for Your Business
After you identify the right metrics for your business, you need to learn how to set up organizational and process metrics.
Let’s get started:
Step # 1: Defining Your Metrics
Start by ensuring you define all metrics clearly so that your organization can create benchmarks. The best way to keep KPIs understandable is by following the SMART models:
- Specific – Your goal must provide some level of detail;
- Measurable – Your metric should be in terms of numerical value;
- Achievable – Your KPI must be attainable and accomplishable;
- Relevant – Your goal must link to your overall business goals;
- Time-based – Make sure you add a time frame while choosing a metric.
Remember to set your metrics carefully, or you could risk your business.
Step # 2: Getting it Approved
Successful implementation of a metric requires the approval of senior managers and employees. Introducing new metrics to measure performance and track results brings the promise of change and, thus, naturally attracts resistance.
So, before discussing new metrics with your team, get endorsements to showcase its importance and get everyone on board.
Step # 3: Understanding the Data You Need to Collect
It’s not unheard of for companies to spend hours discussing a metric, only to discover their processes or tools cannot generate the necessary data. That means your business might need to make some investments.
But before you spend cash, clearly define how your business can benefit from analyzing the metric. Metrics must be standardized and provide the same answer regardless of who calculates it.
To boost business efficiency and deliver tangible progress, everyone tracking and calculating the metric must be honest. While it may raise questions about why your business is not performing well, understanding your company’s current position is the first step to improving.
Step # 4: Measuring the Results
Unfortunately, many companies design metrics and buy expensive tools only not to use the results. Why? It’s because large organizations tend to set too many metrics.
So, when choosing new metrics, remember to keep them manageable. Implementing five meaningful metrics is better than 100 that you won’t use.
Remember to measure your results, learn from others, and never hesitate to contact team members to ask how they are progressing. If your organization has multiple departments, leaders should set up weekly or daily meetings to review progress and discuss areas of improvement.
Step # 5: Improving Continuously
Lastly, never forget the “continual” part of improving your organizational metrics. You’ll have to revise your metrics from time to time as your business evolves and your customer base expands. By introducing a new set of metrics, you can ensure they still measure what they intended.
11 Metrics to Grow Your Business
Now that we’ve discovered what metrics you should use and how to implement them, let’s go ahead and start tracking the best eleven KPIs:
Conversion Rate
Here’s the truth: not every lead converts to sales. Therefore, you need to track your leads to sales conversion rate.
You can calculate your leads to sales conversion rate:
Divide the number of total sales by the total number of leads.
Multiply the answer achieved by 100.
You’ll receive your leads to conversion rate!
Example
Consider that you generate 30 sales from 50 leads. Now:
® 30/50= 0.6
® 0.6 x 100
® 60%
Thus, your conversion rate will be 60%.
Why Calculate Conversion Rate?
With this data, you can identify improvement areas to improve your sales conversion rate. Furthermore, you can predict your traffic to sales conversion rate and forecast revenue efficiently.
Return on Investment (ROI)
ROI measures the profitability of your investment in a product, service, or activity. You can implement these metrics across your company’s sales, marketing, and service sectors.
Here are the steps to calculating your ROI:
- Calculate your net profit;
- Divide the net profit by the cost of the initial investment;
- Multiply the answer you receive by 100;
- The result you achieve is your ROI.
Example
Consider that you spend $100 on a monthly subscription box. Now, if you record eight conversions while selling each for $80, your ROI will be:
® 8 x $80/$100 = 6.4
® 6.4 x 100 = 64%
Why Calculate Return on Investment?
Calculating your company’s ROI allows you to identify how well your business and its departments perform. In addition, this metric tells you what is profitable and what needs improvement.
Customer Lifetime Value (CLV)
Customer Lifetime Value or Customer Lifetime Revenue reveals how much revenue you can expect from customers. Measuring CLV or CLR requires a significant amount of data and effort.
Here’s how you determine your organization’s CLV:
- Multiply the value for the average sale by the retention time and by the number of transactions they generate
Example
Let’s say a customer who visits your website once a month spends $25 per visit over an average lifetime of 8 years. So, your calculations will be:
® 25 x 8 x 12 = $2,400.
Why Calculate LFV?
Calculating this metric allows you to identify your spending for customer acquisition. Moreover, it tells you which issues are reducing customer retention by identifying customer segments that are too difficult to convert.
Customer Retention and Churn
A relatively new yet equally crucial metric, your customer retention, and churn rate represent customer success metrics.
Customer churn is the rate of customers who stop buying products or services. Here’s how you can calculate this metric:
- Identify the number of customers attained over a set timeframe;
- Subtract the number of new customers acquired during this time;
- Divide the achieved result by the customers at the start;
- Multiply the number by 100.
On the other hand, Customer retention represents the percentage of customers retained or active during a set time frame. You can calculate it by:
- Minus 100 by the customer churn
Example
Let’s consider that you have 50 customers during the first quarter and only 35 at the end. You can calculate churn and retention rate by:
® Calculate the Number of Customers at the Start – 50 – 35= 15
® Divide the Result by the Total Number of Customers during the Start – 15/50 = 0.3
® Multiply by 100 – 0.3 X 100 =30%
Thus, your customer churn rate will be 30%.
® Retention Rate – 100 – 30 = 70%
Why Calculate Customer Retention and Churn?
Calculating customer retention and churn allows you to identify customer growth within a given time frame. In addition, these metrics help you calculate customer satisfaction rates.
Customer Acquisition Cost (CAC)
Following customer retention rate and churn, another metric that your business must measure is Customer Acquisition Cost.
CAC tells you the cost of obtaining new customers via different marketing and sales efforts. Here’s how you can calculate this metric:
® Identify the total marketing or sales expenses
® Divide the achieved value by the total number of conversions
Example
Consider that your business invests $2000 to acquire 100 customers over a year. Then your cost of acquisition would be:
® $2000/100 = $20 per acquisition
Why Calculate Customer Acquisition Cost?
Your customer acquisition cost reveals how much you can afford to spend to acquire new customers. Furthermore, it provides a more accurate ROI from sales and marketing activity.
Return on Ad Spend (ROAS)
Return on Ad Spend is a valuable metric that informs you about the revenue you earn from every dollar spent on advertising.
Like return on investment, ROAS allows you to measure the ROI of digital advertisements, such as social media campaigns.
Here’s how you can calculate your ROAS:
- Divide the revenue invested in ads by the total costs of ads
Example
Let’s say you invest $150 into your ad campaign and generate $300 in revenue. So, your calculations would be:
® $300/$150 = 2
Thus, your ROAS will be 2.
Why Calculate Return on Ad Spend?
Measuring this marketing metric allows you to identify how much advertising contributes to the bottom line. In addition, you can determine the performance and success of a specific campaign or ad.
Percentage of Revenue of New vs. Existing Customers
Percentage of Revenue of New vs. Existing Customers is the perfect way of answering the age-old question: should I invest my money and efforts towards new or old customers?
These KPIs reveal your current customer status and where you need to focus your money, sales, and support efforts.
Here’s how you can calculate this KPI:
- Divide the value of new/existing customer revenue by total revenue;
- Multiply the answer by 100.
Example
Let’s say that the CAC is $1000 and the customer profit is $500 per year. If the loyalty rate of new customers is 60% and the retention rate is 80%, your calculations would be:
Customer Lifetime Value of New Customers
® $500 X 2.5 years, less $1,000 = $250
Of Existing Customers
® $500 X 5 years = $2,500
Why Calculate Percentage of Revenue of New vs. Existing Customers?
Analyzing this metric allows you to identify whether you should invest time, money, and effort in acquiring new customers or retaining old ones.
Net Profit Margin
The net profit margin measures your company’s ability to generate profit compared to its revenue. With this metric, you can identify whether your revenue translates into profitability.
You can calculate the net profit margin by:
- Dividing the net profit by revenue;
- Multiplying the value by 100.
Example
For each $1 of revenue, your company earns a net profit of $0.20. So, the calculations would be:
® $0.20/$1 = 0.2
® 0.2 x 100 = $20 profit margin
Why Calculate Net Profit Margin?
Analyzing this valuable metric enables you to predict long-term growth effectively.
Website Traffic
Website traffic helps you measure your website’s visitors each month. The metric provides a quantitative value to gauge the success of your marketing effort and brand reputation.
Here’s how you can calculate website traffic growth:
- Subtract the number of new users over a set of time by the number of new ones;
- Divide the result by the number of new users;
- Multiply the value by 100.
Example
Let’s say you acquired 50 new customers in 2022 and had 27 in 2021. Then your calculations would be:
® 50 – 27/27 = 0.85
® 0.85 x 100 = 85%
Why Calculate Website Traffic?
Calculating this metric allows you to identify how people find your company and website. In addition, it offers insights into areas you need to improve.
Sales Revenue
Sales revenue shows businesses if customers are willing to purchase their products. Moreover, it tells companies if their marketing efforts are paying off and if the business is still in the competition. When calculating sales revenue, it is crucial to understand that multiple factors affect the results. The person tracking the results must evaluate the changing trends, previous marketing campaigns, and competitive actions.
You can measure sales revenue by adding the income from clients’ purchases and subtracting the cost of returned or undeliverable products.
Sales revenue = sales income – returned products
Example
For instance, the company’s sales income is $10,000 a month. However, the cost of undeliverable products is $4,000. So, the sales revenue of that month would be
$10,000 – $4,000 + $6,000
Why Calculate Sales Revenue?
Calculating startup sales revenue is crucial because it tells them if the business is making profits or losses. Again, it shows companies how much more effort the business needs to make to reach sales targets.
Gross Margin
The higher the gross margins, the more the company earns on every dollar. Calculating gross margins help startup businesses to reflect on their processes and to make improvements where needed. It allows businesses to invest in other operations.
For gross margin calculation, you can subtract the cost of goods sold from total sales revenue and divide it by the total sales revenue.
Gross Margin = (sales revenue –goods sold) / sales revenue
Example
For instance, the company’s monthly sales revenue is $20,000, and the cost of goods sold is $15000. So, the gross margin would be:
- ($20,000 – $15000)/$20,000
- 0.25
Now multiply it with 100 to convert the answer into a percentage.
Why Calculate Gross Margin?
Gross margin is crucial for new startup companies because it reflects the organization’s efficiency in productivity and processes.
Bonus: What Other Metrics Should You Track to Grow Your Business?
Here are some more key metrics that can help businesses to track their growth.
Employee Happiness
Every business aims to satisfy its customers. And companies need to keep their employees happy to have happy customers. A recent study shows that employees work 12% more effectively when they are happy at work. Therefore, maintaining employees’ high satisfaction levels leads to commitment and devotion.
How to measure:
Companies can conduct team surveys or use HR tools to collect feedback on the personal satisfaction level.
Lead-to-Client Conversion Rate
Leads do not convert into loyal customers automatically. The company’s sales teams must contact them to convert them into paying customers. The Lead-to-Client Conversion metric shows sales teams’ performances. Furthermore, it shows the quality of the product – if the lead does not turn into a client, then they are unimpressed by what the company is offering.
How to measure:
You can calculate the Lead-to-Conversion metric in the following way:
Lead-to-Client Conversion Rate = the number of monthly new leads/monthly new customers.
Sales Growth Year-to-date
Sales Growth Year-to-date shows the speed at which the organization’s sales revenue increases or decreases. Businesses must monitor their sales growth at different monthly or yearly intervals to better understand the company’s performance.
How to measure:
Companies must evaluate their monthly sales revenue and the number of new deals. If your company has multiple teams, you can track each team’s performance to overview each department’s progress.
Lead response
The lead response time is crucial in many industries because the quicker the representative responds to a query, the more engaged the person would be, leading to increased chances of sales.
How to calculate:
To calculate lead response:
Lead response time = Adding all the time between lead contact and sales reps answer for all contacts / Total number of leads
Cost per lead (CPL)
Cost per lead helps companies to identify the cost needed to attract and retain a customer. Determining the cost per lead will help businesses set their budgets accordingly.
How to measure:
You can calculate the Cost per lead (CPL):
Cost per lead = Total marketing spend / Number of new leads
What Are Key Metrics in Business?
Key Performance Indicators are measurable values to demonstrate how effectively and efficiently your company achieves key business objectives. KPIs are quantifiable measures to judge your business’s performance level and value. Some of the key metrics are:
- Sales Revenue;
- Gross Margin;
- Net Profit Margin;
- Sales Growth Year-to-date;
- Customer loyalty and retention;
- Cost of Customer Acquisition;
- Net Promoter Score;
- Qualified leads per month.
How Do I Know Which Metrics I Should Track?
Determining which metric to track may be different for every business because every business has other goals. However, some common figures that companies follow to measure growth and success are:
- New Customers;
- Cost-Per-Acquisition;
- Gross Revenue;
- Profit Margin;
- Net Revenue;
- Conversion Rate;
- Leads Generated.
How Are Metrics Used in Business?
Business metrics are quantity-based data that can help you track, monitor, and assess the profits or losses of different business processes. The main objective of using metrics in companies is to measure the organization’s progress toward short and long-term goals.
Why Is Defining Metrics Important?
Metrics are crucial for businesses because they put calculations into a context that helps companies make fact-based decisions. These critical metrics are necessary for businesses to make decisions based on experience and gut instinct. Moreover, metrics give organizations objective evidence of the service, process, or activity’s performance.
Conclusion
Tracking key metrics is crucial for every business. Since businesses need to track their sales and revenue to ensure they are making profits, it is critical to use specific key metrics to help them calculate their earnings. These key metrics help businesses convert leads into loyal customers, increasing the chances of sales.
Tracking key metrics is critical for multiple reasons, but the most crucial reason is cultural. Key metrics lead to a culture of success when you witness vital metrics moving in the right direction. Therefore, businesses should not miss opportunities to celebrate once they reach their milestones.