HOW DO YOU measure your company’s performance?
The way not to do it is by following your gut feeling. Running a successful business requires a thorough analysis on the work, sales, and financial results. And it can’t be done without tracking relevant business metrics.
Business metrics, also called KPIs (key performance indicators) display a measurable value that shows the progress of a company’s business goals.
They’re usually tracked on a KPI dashboard. Business metrics indicate whether a company has achieved its goals in a planned time frame.
There are hundreds of different key performance indicator examples, but there’s no use in measuring all of these. Depending on your business goals, you should track business metrics that really show how your business is doing.
Tracking irrelevant KPIs will distract you from focusing on the things that truly matter. This way, you’ll end up stressing about the numbers that have no actual impact on your company’s development. So it is highly important that you not only track business metrics but also choose the right ones to perceive.
Examples of business metrics:
- Sales Revenue
- Net Profit Margin
- Gross Margin
- MRR (Monthly Recurring Revenue)
- Net Promoter Score
Up next, we’ll explore 12 popular business metrics that reflect on your company’s performance and indicate growth or decline.
1. Sales Revenue
We chose to put this metric first as it can tell a lot of things about your company. Month-over-month sales results show whether people are interested in buying your product/service, are your marketing efforts paying off, are you still in the competition, and much more.
When evaluating your sales revenue and setting goals, it is important to remember that sales results are affected by multiple other factors. The person tracking the sales KPIs should also be aware of recent changes in the market, previous marketing campaigns, competitive actions, etc.
How to measure:
Sales revenue is calculated by summing up all the income from client purchases, minus the cost associated with returned or undeliverable products.
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How to improve:
The most obvious way to grow your sales revenue is to increase the number of sales. This can be done by expanding your marketing endeavors, hiring new salespeople, or making discount offers that are hard to resist. Growing your sales revenue should be a long-term strategy rather than a quick (and temporary) boost in sales.
2. Net Profit Margin
This business metric indicates how efficient your company is at generating profit compared to its revenue. Basically, this number tells you how big a sum of? each dollar earned translates into profits.
The Net Profit Margin is a good way to predict long-term business growth, and see whether your income exceeds the costs of running the business.
How to measure:
Calculate your monthly revenue and reduce all the sales expenses.
How to improve:
You can improve your company’s Net Profit Margin by increasing your revenue.
The easiest way to do this is by raising the price of your products/services and selling more. Another method is to lower your sales and production costs while keeping up with the competition. Both of these tactics require thorough market research and long-term business strategy, and can’t be done overnight.
3. Gross Margin
The higher your Gross Margin, the more your company earns by each sales dollar. You’ll be able to invest it in other operations. This metric is especially important for starting companies as it reflects on improved processes and production. It’s like the equivalent of your company’s productivity, translated into numbers.
How to measure:
The Gross Margin equals your company’s total sales revenue minus its cost of goods sold, divided by the total sales revenue.
Alright, let’s put it into an equation.
Gross Margin = (total sales revenue – cost of goods sold) / total sales revenue
How to improve:
Gross Margin can be improved by making both your sales and production processes more efficient.
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4. Sales Growth Year-to-date
Who wouldn’t love to see their company grow month-over-month? But sometimes, sales are highly dependent on the season and the mood of the customers. Sales Growth Year-to-date indicates the pace at which your company’s sales revenue is increasing or decreasing.
Monitor your sales growth over various time periods – monthly, yearly, and long-term metrics will give you a better understanding of where your company stands. Make it a goal to accelerate your sales growth every month, or at least keep it at the same percentage, month over month.
How to measure:
Check your monthly sales revenue and the number of new deals.
If your sales team work in multiple teams, you can also track this business metric by every team. This way, you’ll get a better overview of each sales department’s achievements.
How to improve:
Similarly to Sales Revenue metric, this KPI can be increased by investing more resources in your marketing and sales activities. Sales Growth can also be boosted by positive media coverage or new product launch.
5. Cost of Customer Acquisition
Have you ever thought about how many small things contribute to acquiring a customer?
The Cost of Customer Acquisition (CAC) is calculated by dividing all the costs spent on acquiring new customers (marketing expenses) by the number of new clients acquired in a specific time frame. If you spent $8000 on marketing in September and acquired 40 customers in this time frame, your CAC is $200.
The Cost of Customer Acquisition should always be measured together with the Customer Lifetime Value. If a new client is worth the average of $1400 to you, acquiring them for $200 is a reasonable deal.
How to calculate:
The easiest way to calculate the average Customer Lifetime Value is to multiply the average value of a sale by the number of repeat transactions and the average retention time in months for a typical customer.
Calculating the CLV depends on your product specifics – are you selling on a monthly basis, is it a big one-time transaction, or do people return to make repeat purchases? Here’s a great infographic by Kissmetrics, explaining the CLV in-depth.
How to improve:
Evaluating the Customer Lifetime Value of various client segments can help you understand which segments bring in a higher profit. Let go of clients who are decreasing your net profit and difficult to convert, and focus on the most rewarding audience.
6. Customer loyalty and retention
Having loyal customers is beneficial in many ways. It helps to grow your sales and spread the word about your product. The Retention Rate shows the number of clients who keep using your product over an extended time period and make repeat purchases.
How to measure:
Here’s a quick formula for calculating the Retention Rate
Retention Rate = (((CE-CN)/CS)) X 100
CE = number of customers at the end of a certain time period (1 year, for example)
CN = number of new customers acquired during the same time period
CS = number of clients at the start of the time period
How to improve:
Customer loyalty can be increased over time by providing excellent customer care and delivering high-quality products.
7. Net Promoter Score
Net Promoter Score reflects on the quality of your product and the level of customer satisfaction. It shows how many people are likely to recommend your product/service to a friend.
According to Net Promoter Network, there are three levels of customer advocacy:
- Promoters (score 9-10) are loyal enthusiasts who praise your company to others and drive your sales
- Passives (score 7-8) are satisfied but unenthusiastic customers who leave when they see a better offer.
- Detractors (score 0-6) are disappointed customers who spread negative information about your company and can damage your brand’s image.
How to measure:
This marketing metric can be measured on a ten-point scale by conducting customer surveys and interviews. The easiest way is to ask this question in the follow-up email of a product order or new subscription. It takes some time to gather data and evaluate the results but it gives you many insights into how to improve your product/service.
To calculate the Net Promoter Score, subtract the percentage of Detractors from the percentage of Promoters.
How to improve:
Provide the very best customer service and deliver high-quality service. Offer benefits and information that your customers didn’t even expect to receive to make their user experience as good as possible.
8. Qualified leads per month
As your company grows, you’ll be able to invest more resources in marketing and sales. Soon, you’re going to have hundreds of new leads each month. But not all of these leads have the potential to become a customer.
That’s why you need to measure the number of qualified leads per month.
This business metric shows whether you’re targeting the right market with the highest potential of attracting new customers. If the number of qualified leads is declining, it means you need to re-evaluate your marketing campaigns and sales strategy.
How to measure:
You can categorize your new leads into three distinct groups:
- Marketing qualified leads (MQL) – leads that are qualified by the marketing team on the premises that they match your potential lead requirements (size of the company, expectations, etc.)
- Sales-accepted leads (SAL) – leads that the marketing team has forwarded to the sales team, and are waiting for the final approval before the sales process begins
- Sales qualified leads (SQL) – leads qualified by the sales team that has the highest potential of becoming paying customers
How to improve:
Instead of targeting millions of people, focus on a niche audience that has the highest probability of being interested in your products.
9. Lead-to-Client Conversion Rate
Leads do not turn into customers on their own. They need to be contacted by your sales team who will convert them into paying clients.
The Lead-to-Conversion business metric reflects on your sales team’s performance. Moreover, it might indicate the quality of your product – if leads fail to convert, they might be unimpressed with what you’re offering.
How to measure:
To calculate the Lead-to-Conversion KPI, divide the number of monthly new leads with the number of monthly new customers.
How to improve:
To improve this metric, you first need to find the cause behind the low sales conversion rates. It might be a poorly-performing sales team, but it might also be a bad product-market fit. Here’s a great article by ConversionXL on how to improve your conversion rate.
10. Monthly website traffic
One of the best indicators of your company’s reputation in the monthly website traffic. The more people hear about your product, the more likely they are to check out your web page.
How to measure:
Use a free marketing tool such as Google Analytics to track your monthly website traffic as well as the traffic sources, to understand how people find your site.
How to improve:
The easiest way to do it is to increase the advertising budget. But there are many free and more efficient tactics: getting free press coverage, sharing valuable advice on social media channels, betting on search engine traffic with SEO, etc.
11. Met and Overdue Milestones
Every business has goals and milestones. Maybe you’d like to double your sales revenue by the next quarter, or maybe you’re planning a new product launch. All of these big goals are actually projects that can be divided into milestones to mark their progress.
Checking the number of met and overdue milestones gives you a quick overview of your team’s capacity. If you constantly fail to meet the milestones, it might be time to hire some extra hands or align your ambitions with reality.
How to measure:
Set up various project milestones and keep track of whether they’re met in time.
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How to improve:
If your company’s team constantly crosses deadlines, it should raise a red flag. There are three reasons to look out for: unreasonable expectations, insufficient resources, and low productivity. After you’ve discovered the problem, focus your energy on solving it. Moreover, ensure that you’ve set the right priorities.
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12. Employee Happiness
Happy employees = productive employees. New research suggests that we work 12% more effectively when we’re happy at work.
Keeping the satisfaction level high leads to a long-term commitment to the team and company. That’s why it’s important to regularly check whether your employees are happy and feel rewarded for their work.
How to measure:
Conduct team surveys or use an HR tool to collect quick feedback on the teamwork and personal satisfaction levels.
How to improve:
The fastest solution to increased employee satisfaction is introducing some new perks, e.g. free coffee in the office. But the long-term solution to motivating your team is being a good example and practicing what you preach. Companies with a strong sense of mission project on their team, making everyone more motivated.
Quick recap
While there are many more important business metrics that companies can and should measure, these 12 will give you a quick overview of the current state of your business.
- Sales Revenue
- Net Profit Margin
- Gross Margin
- Sales Growth Year-to-date
- Cost of Customer Acquisition
- Customer Loyalty and Retention
- Net Promoter Score
- Qualified Leads Per Month
- Lead to Client Conversion Rate
- Monthly Website Traffic
- Met and Overdue Milestones
- Employee Happiness
Which business metrics do you measure, and what are the best tools for doing it? Share your thoughts in the comments section!