There are a handful of key performance indicators that all small business owners should keep a watchful eye on. Understanding these metrics and improving upon them can really help a small organization take that leap onto the next business gradient. These vital small business metrics are as follows:
1. New Customer Acquisition Cost (CAC). Calculated by dividing the total cost of acquiring the new customers by the total number of new customers who have come into your business funnel. This metric gets right to the very bottom of that key question – are your promotion and advertising campaigns profitable? The odd loss making campaign is par for the course, but if you have more campaigns that are losing money then it might well be time to re-evaluate your marketing tactics and procedures.
2. Lifetime Value Per Customer (LTV). Ideally, you’ve got a business model where a percentage of your customers come back to make repeat purchases. Understanding the average lifetime value per customer provides many benefits – for a start, when you know your average LTV value, it can help you make informed judgements on how high your’re willing to go to acquire new customers. Ideally you want your lifetime value per customer to be as high as possible, and certainly higher than the industry average. Calculating LTV can be a little tricky, one of the best methods is to calculate what a customer spends on your business over a certain time period. This number can then be compared to the CAC (it should of course be significantly higher).
3. Churn Rate. Unfortunately, losing some clients over time is an inevitable part of business life. The churn rate of your business measures this bleeding of clients – a suspiciously high churn rate could be an indication that something, somewhere is going wrong in your business – perhaps your product/service is becoming obsolete, or there is stiffer competition luring your clients – either way, keeping an eye on the churn rate is vital to ensure that on the whole, your customers are happy with what you’re providing.
4. Staff Productivity Metrics. A company can only be as efficient as the people who work within it. Arguably, staff productivity metrics are especially vital for smaller organizations, as each individual has far more impact on the bottom line than in large companies who may employ hundreds, if not thousands of workers. There are several staff productivity metrics that can be calculated. For instance, sales revenue per worker (total sales divided by the number of employees), profit per worker (operating profit divided by the number of employees) and output per worker (for example total number of widgets manufactured divided by number of employees).
5. Inventory Metrics. The smaller a business, the greater the pressure to get inventory levels bang on target. It’s a tricky balance to get right, and most small businesses will either have too much inventory making up their short term assets (resulting in storage costs, strained cashflow and perhaps even the risk of spoilage) – or too little, which can lead to reduced sales and even brand damage if customers are persistently not being served. Having a firm understanding of your business inventory metrics can help your business keep optimum levels of stock without straying to either extreme.
As with all metrics and performance indicators, having a robust and reliable comparison is crucial. Good measurement yardsticks can include metrics either from past years, the business plan or competitors.