Charting a course towards professional success without knowing precisely how your business is performing is like trying to strictly adhere to speed limits while navigating unfamiliar roads with a busted speedometer. Technically possible, but incredibly unlikely. And if you screw up, you won’t just get a speeding ticket — you’ll see all your profits slip down the drain. But unlike with your car speed, there’s no single metric you can focus on. How should you proceed?
Well, in an ideal world, every fresh business would come equipped with a healthy set of KPIs — key performance indicators — providing enough information for the business owner to keep track of how things are going. Since this isn’t an ideal world, though, you need to set, track and nurture them yourself (title callback!). But here’s the good news: most of the work is a one-time setup deal. After that, everything will be much easier.
So if you’re ready to get your business under control, keep expenses down, and start steering it in the right direction, you’ve come to the right article. We’re going to look at some of the KPIs you might need, cover how you can start tracking them and explain a general process for improving any given metric. How does that sound? Let’s get started.
Set: How to Choose the Right KPIs for You
Pretty much every business will have some general top-end KPIs like how much money they make or how many customers they have, but you obviously can’t stop there. Everything needs to be fully codified and set down in a consistent and meaningful way. Let’s take a look at some common KPIs, and you can gauge how useful they might be for you:
1. Net profit
When you take your overall revenue and subtract the material costs of the goods needed to yield it, you arrive at your gross profit, but that isn’t the number you should be concerned about. Your net profit is your gross profit minus any additional costs (often involving marketing or taxation). This is obviously vital!
- Why you need it: Any other baseline profit figure will give you a false impression of where you stand. Net profit tells you whether you come out ahead once absolutely everything has been factored in.
- The formula: Revenue – Costs = Net Profit
2. Net profit margin
This KPI consists of your net profit divided by your total revenue, returning a figure that quickly tells you how much profit you’re making on every dollar you spend on sales. This information will give you a good idea of your overall profitability, and thus the sustainability of your business model.
- Why you need it: Profitability is all relative to your overall spend — a good profit for a small business is terrible for big business. This KPI is a relative rating, so it’s great for any size of business.
- The formula: Net Profit ÷ Revenue = Net Profit Margin
Also Read: How to Pitch Your Business Ideas to Potential Investors.
3. Operating cash flow (OCF)
How much cash does your business generate every day, or a week, or month? Being profitable isn’t enough to expand if you’re not bringing in enough money overall, or to avoid operational problems.
- Why you need it: This figure clearly shows how much money your business is bringing in through its regular operations, making it vital for demonstrating sustainability and opportunity for growth.
- The formula: Revenue – Operational Expenses = Operating Cash Flow
4. Qualified lead rate
Every business with marketing has a point at which it must attempt to turn marketing (initial) leads into sales (seriously interested) leads. If your qualified lead rate is low, it can suggest that the first step of your sales process (or the last step of your marketing process) is deeply flawed.
- Why you need it: A sales process needs to be smooth and strong throughout, but businesses often make the mistake of thinking that all that matters is getting initial leads. Using this KPI, you can see how many valuable leads you’re getting.
- The formula: Marketing Leads ÷ Sales Leads = Qualified Lead Rate
5. Lead to close rate
There’s a significant gap between the point at which you bring in leads and the point at which you make sales. During that gap, leads will drop out of contention for whatever reason. The better your lead to close rate, the more efficiently you’re turning leads into sales.
- Why you need it: Conversions are what matter in the end and a lead only has value when it raises the likelihood of someone converting. Track this KPI to see how effective your entire sales funnel is.
- The formula: Leads (Marketing or Sales) ÷ Conversions = Lead to Close Rate
6. Customer turnover
Otherwise known as churn, this KPI concerns the rate at which existing customers leave, and is particularly important for subscription-based businesses. The higher the rate of customer turnover, the more rapidly the business must attract new customers to replace them.
- Why you need it: Loyal long-time customers spend more and are invaluable for getting recommendations. It’s also much cheaper and easier to retain a customer than it is to win a new one.
- The formula: Customers Lost during Period ÷ Customers At Beginning of Period = Customer Turnover for Period
7. Average order value
The higher the average order value, the fewer orders are required to push up revenue, and the more trust in the company the customers can be presumed to have (they could be buying expensive items, or numerous cheaper items together).
- Why you need it: A company sustained by numerous small orders must retain many more customers, plus a high conversion rate can give a false impression of much higher profitability.
- The formula: Revenue ÷ Number of Orders = Average Order Value
8. Customer lifetime value
As noted, loyal long-term customers tend to steadily increase in value. This KPI gives you an idea of how much each of your customers is actually worth to your business, allowing you to decide how much to spend on retention.
- Why you need it: You can’t give every customer a premium experience, nor can you afford to never put in the extra effort to retain someone valuable. If you know that each customer is worth a large sum, you can justify some additional expenditure to keep someone loyal.
- The formula: (Average Monthly Revenue * Gross Margin per Customer) ÷ Average Monthly Customer Turnover = Customer Lifetime Value
9. Net promoter score
Using survey feedback, this KPI sorts customers into categories based on how likely they’d be to recommend you to others. The more net promoters you have, the more referrals you’ll receive.
- Why you need it: Brand advocates are incredibly valuable, and the small difference in customer service needed to make someone a net promoter has a huge return on investment.
- The formula: (Number of Promoters — Number of Detractors) ÷ (Number of Respondents) = Net Promoter Score.
Also Read: 4 Important Metrics To Track For Business Growth In 2019.
10. Customer acquisition cost
This is how much it costs you to earn a new customer, and can be calculated by dividing the total you spent on marketing in a given period by how much new customers you earned during that time.
- Why you need it: Especially if you’ve already figured out your customer turnover, you’ll need to keep a close eye on this to make sure that you’re not spending more to win a customer than they’re actually worth.
- The formula: Marketing Spend during Period ÷ Customers Won during Period = Customer Acquisition Cost
11. Social media followers
If your business has a significant presence in the PR world, or simply engages in a lot of social media marketing or content marketing/curation, then your social media follower counts will be worth tracking.
- Why you need it: The more followers you have, the greater an audience you can reach through your marketing materials, the more easily you can become established as an industry expert, and the more credible you’ll seem like an authority to outside observers.
- The formula: N/A (just check your social media accounts!).
12. Average time on site.
When the average prospective customer arrives on your homepage, how long do they spend there? If they’re not spending enough time to read the entirety of the content you’re using to target them, then you may need to take corrective action.
- Why you need it: People browse the web so quickly that they might end up spending half a second on a page before leaving. As such, you can get a vast number of visits but not actually see any benefit because no one is sticking around.
- The formula: N/A (calculated for you in Google Analytics)
There are many more possible KPIs to choose from, but this selection should give you a good start. Remember that you don’t need to track them all — in fact, trying to do so would likely prove counterproductive because you’d be unable to see the wood for the trees. Just aim to pick out the KPIs that are the best fits for your business, and focus accordingly.
Track: How to Configure Your Digital Analytics
The very first thing you’ll need to do (assuming you have a business website, which I think is a fair assumption given the name of this site!) is making sure that you have digital analytics enabled on your business website. If your site runs on a standard CMS (such as WordPress), it shouldn’t be too tricky to install Google Analytics — if your site is an e-commerce store on a popular CMS, though, you’ll have analytics configured by default in your dashboard. Easy!
Thankfully, whether you end up tracking your KPIs through Google Analytics or the internal dashboard system of an e-commerce CMS, you should have fairly similar options. All of the most important stats will be tracked already, making the next step a matter of configuring your view and making some custom tweaks.
If you’re using Google Analytics with a generic CMS, you should look to the following resource: How to Set Up and Track Your Bottom-line KPIs.
E-commerce content management systems in particular have a great setup out of the box for viewing stats, and strong integrations for hooking data into other systems, making it ideal for website flippers (if you take a look at Exchange’s array of successful businesses developed with Shopify, you’ll see the value of being able to see the exact revenue record of a business asset). And of course, WooCommerce, running through WordPress, has a wide range of plugin options.
Regardless of your exact system, the ultimate goal of this step is to end up with a dashboard that gives you an at-a-glance view of the KPIs you selected as the most important for your business. If you can establish that, you’ll never need to spend hours poring through your data trying to figure out where your business is falling short. It’ll be clear from your dashboard.
Also Read: Complete Guide To Risk Management For Small Businesses.
Nurture: How to Make Steady Improvements
Lastly, with your handy wall of KPIs ready to review at any time, you can start picking out particular things you want to improve upon. Take the example of your customer turnover. If your business, in general, is performing well, but your customer turnover rate is very high, you would stand to benefit enormously from working to bring that rate down.
To do this, you would scour your entire customer journey, figuring out where you could make your customers happy by addressing their concerns or delivering additional value. You may well find that there’s one particular grievance that comes up time and time again, and it wouldn’t even be that tricky to address — one simple fix could prove that you care about what your customers think and significantly lower your churn rate in the process.
KPIs are, as the K suggests, key. The longer you run your business without clearly-defined and meaningful metrics, the harder it will be to figure out what’s going wrong (so you can fix it) and what’s going right (so you can do more of it). Get your core set of KPIs identified and tracked as soon as possible, and you can start nurturing them to improve your business where it counts the most.
Kayleigh Alexandra is a content writer at Microstartups. Microstartups.org is a website by a team of writers and marketers, dedicated to supporting and spreading the word of micro businesses of all shapes and sizes. MicroStartups believes in business growth through giving and supporting the local community.