Data can unearth a whole lot about how your business is doing, so you can make more informed decisions. For instance, a number of unique visitors to your website in a month can tell you how your brand awareness strategy is doing. However, analyzing data is only useful when you are analyzing the right information. Keeping track of your social media followers, for instance, does not help you much in terms of refining your strategy. Instead, if you track average engagement per post, it tells you if you are creating the right kind of content. Based on that information, you can then tweak your overall content strategy for better results.
What You Measure Depends On What Stage Your Business Is At
For an early-stage business, it does not make much sense to track customer acquisition costs. Typically, in the early stages, businesses focus more on awareness and retaining customers. Metrics such as customer acquisition costs are more relevant for growth strategies. Similarly, for a business consolidating its customer base, it may make more sense to track churn rate and monthly (or quarterly) renewals.
The metrics you should measure also differ between industries and types of businesses. An ecommerce store, for example, may be better off measuring average order value than keeping track of page views, which would make more sense for an online publishing company.
But even before you decide on which KPIs to keep track of, it is important to understand the difference between KPIs and metrics.
KPIs versus Metrics: What’s The Difference
Metrics are quantifiable information that tell you how a particular area of your business is doing. For example, your digital marketing department might keep track of metrics such as monthly inbound traffic, engagement on social media posts, and email subscription rates. While these numbers are useful, since they tell you how your marketing strategy is working, they don’t tell you how your overall business is performing.
For instance, you might get 100,000 visitors to your ecommerce store, but if your sales are tanking, your business is not doing very well. Another example to explain the difference between KPIs and metrics could be if you have a mobile app. Tracking daily or monthly downloads is great to get a sense of how brand awareness is working. However, the number does not tell you if your users are engaging with your app, how often, or if their engagement is leading to revenue. Keeping track of monthly active users generating revenue, in this case, is a key performance indicator (KPI) since it tells you how your product is actually performing.
To put it succinctly, KPIs give you deep insights into how your business is performing. Based on these insights, you can then analyse related metrics to fix and optimize various areas of your business. For example, if a SaaS company is experiencing high churn rate (KPI), it could be due to low engagement rates. Tracking engagement rates (metric) can help you drill down into likely causes for it, some of which could be:
- A buggy product
- A mismatch between the product and market expectations
- Lack of customer support
Typically, companies should measure 5-7 key performance indicators to get an overall sense of how their business is performing.
KPIs You Should Track for Managing Growth
After you have nurtured your early customers and reached critical mass, it is time to start planning for growth. However, it is easy to get lost in vanity metrics. 50,000 unique monthly visitors on your ecommerce store looks great on paper. However, it does not tell if they are buying from you, how many are repeat customers, or how much did that sale cost you?
If you are gunning for growth, here are 5 KPIs you should have your eyes on, all the time.
Cost of Customer Acquisition
Acquiring new customers takes money. This cost includes every kind of marketing activity that you have undertaken in order to get the customer to buy from you. This includes organic methods such as creating blog posts and social media posts; and direct advertising methods, such as pay-per-click campaigns (PPC) and paying influencers for outreach.
You can calculate your customer acquisition cost by dividing your total marketing expenses with the number of new customers acquired, in a given period. For example, if you spent $100 in a month on marketing, and you get 5 new customers, your customer acquisition cost is $20.
It starts to get complicated when you begin to segregate your marketing costs according to desired goals. For example, out of the $100 spent in a month, you might have spent $20 solely on brand awareness activities. You aren’t expecting any new customers from these activities. In that case, you might decide to calculate your customer acquisition costs based on $80 in marketing expenses.
For the purposes of this post, though, we will keep it simple: total marketing expenses divided by new customers gives you cost per acquisition (CPA).
Customer Lifetime Value
Customer acquisition cost, alone, isn’t of much use. It gives you no idea whether your acquisition costs are high. To get a better picture of the efficacy of your marketing, calculating customer lifetime value is crucial. To illustrate, let’s take the above example of $100 marketing spend to acquire 5 new customers. Let’s assume that customers, on average, only make a purchase worth $18 from your online store, during the entire length of their relationship with you.
Thus, you are spending $20 to make sales worth $18, which clearly makes your acquisition costs too high. On the contrary, if your customer lifetime value is $50, you are doing much better.
Calculating customer lifetime value (CLV) is a little more tricky than calculating customer acquisition costs. To calculate CLV:
- Calculate average order value. To get this number, divide the total value of purchases in a given time period by the total number of purchases. Let’s call this number (AV)
- Calculate the average frequency of purchases. To get this number, divide the total number of purchases in a given time period by the number of unique users who made the purchases. Let’s call this number (f)
- Calculate customer value: Multiply AV from step 1 with f from step 2 to get customer value. Let’s call this number (c)
- Calculate average lifespan of a customer. See the average number of years a customer purchases from you. Let’s call this number (t)
- Calculate CLV. Multiply c from Step 3 with t from Step 4 to calculate customer lifetime value. This is an estimate how much a customer is worth to you, which should dictate your customer acquisition strategy.
Hence, the formula for calculating customer lifetime value becomes: AV*f*t, where AV is the average order value, f is the average frequency of purchases, and t is the average lifespan of a customer.
Visit to Goal Conversion Rates
Are the clicks and visits to your web properties achieving the goal conversion? The goal could be a newsletter signup, a discount coupon, cart checkout, or even a limited-period trail signup. Visit to goal conversion rate is the ratio between the total number of visits to a page and the number of times a goal is reached. It might or might not give you a picture of how your sales are doing. Nevertheless, the number is an important spoke in the wheel of your overall growth strategy.
A low visit to goal conversion rate informs what part of your sales funnel you need to focus on in order to grow. Let’s say you are monitoring a landing page that is designed to fetch newsletter subscribers who can then be nurtured into paying customers. A low conversion rate, in this case, will indicate that you need to optimize your bottom-of-the-funnel strategy.
Using A/B testing to improve your visit to goal conversion rates can have a huge impact on your top line.
Average Order Value
Average order value is calculated in order to calculate customer lifetime value. However, the metric is very important to drill deep into, on its own, too. Average order value can unearth a lot of key information about your business, such as:
- The kind of products people are buying
- Emerging trends
- Where most of your orders are coming from
Based on this information, you can tweak and optimize different areas of your business. For example, if your average order value is low, you could improve your product bundles in order to get people to spend more. Similarly, you could unlock more up-selling opportunities in order to generate more revenue.
Acquiring new customers is great. But a high churn rate will still keep the bottom line weak. An important growth tactic is to build a loyal following. Calculating your retention rate for a given period can tell you how well you are doing in converting customers into brand loyalists. An increase of just 5% in retention rate can translate to a 25% jump in profits (at least).
To calculate retention rate, divide the number of paying subscribers by the total number of paying subscribers that you started with. For example, to calculate month-to-month retention rate for March, divide the number of paying subscribers at the end of March by the number of paying subscribers at the end of February.
Focus on KPIs that give you intelligible information on how your business is actually performing. The other metrics should be used to analyze and fix the KPIs. In addition, don’t focus on too many KPIs at once. Tracking 5-7 KPIs should give you enough information to dictate your growth strategy.
While choosing KPIs to track, consider the stage your business is at and the industry you are in. Some KPIs make better sense for established businesses that are gunning for aggressive growth. For example, a medium enterprise might be better off concentrating on churn rate (or retention rate) to increase profits, since retaining customers is cheaper than acquiring new customers.