How to Understand Your Business Metrics

When starting a business, what might you expect to get out of it? Flexible hours, staff to do all the work for you and more money than you know how to spend?

Well, if you have your own business, chances are you found out the hard way that none of these assumptions are true. I am sure you have a new-found respect for those who have managed to turn their small business into a multi-million-dollar conglomerate — growing a business is hard work!

One aspect of running a business that a lot of people don’t expect is all the numbers that are involved. They drop through the letterbox, they show up in your emails, they’re on your website and the most notable ones are printed on all your bills.

Today, I’m going to help you to understand why, as a business owner, you have to deal with so many numbers. Then, we’ll discuss what those numbers mean and how to use them to your advantage.

The age-old issue when it comes to marketing is this: how do you know if it’s paying off? Many small businesses still struggle with this notion and can’t figure out if their marketing efforts are manifesting as new customers. The truth is, running a business is easier than ever in this digital world — providing you know where to find the information that’s crucial to your success.

A business owner whose accountant shows them a profit and loss sheet that indicates their business is losing money may not understand why, or how to fix the problem. This article is could help you figure out whether or not your business is sustainable.

Why You Need to Track Your Business’ Marketing

  • Cost per lead = how much you spend to acquire 1 lead
  • Customer acquisition cost = how much it costs your business to turn a potential customer into a customer
  • Conversion rate = the percentage of leads that convert into customers
  • Customer lifetime value = how much a customer spends with your business for the duration of their time as a customer
  • Customer retention rate = how effective your business is at retaining customers

Marketers have long struggled to track the success of their traditional marketing efforts. It’s extremely difficult to know how many people saw a billboard or television advertisement. It’s even harder to know if a customer became a customer because of that marketing investment.

Now, we have digital marketing.

Digital marketing makes it simple to track every interaction an individual has with your business. From the moment someone interacts with your website, you can see how and where they found it. It’s important that, as a business, you can see how your various marketing channels are performing.

business metrics

Subsequently, decisions can be made to invest less time and money into less effective campaigns and move those resources into more successful channels. These may include social media platforms, AdWords, search engine optimisation, email marketing or even a link from another website. To make an informed decision as to where to invest your marketing dollars, you must understand which of the various metrics are relevant and how to interpret them.

How to Track Your Business’s Marketing

Metrics can mean the difference between a resource sink and a well of profit. However, the only way they can help you is if you can effectively track and analyse the data. This should be an ongoing practice, as your marketing campaigns can — and will — change frequently, due to shifting trends in the market. Eventually, you’ll be able to compare months, quarters and years of data, highlight trends in your industry and adjust to them accordingly.

Tracking information doesn’t stop at your company’s website. If your business runs a social media page (e.g., Facebook or Twitter), engagement can be tracked down to individual posts. For instance, if you own a hairdressing business and regularly post two types of content — one being pictures of your work and the other being images of the latest hairstyle trends —you might find that the posts of your work get 70% more likes than your other posts.

In this case, it would be worthwhile to cut back on the trend posts and focus more on what your followers want to see — your work. Doing this will result in more engagement (likes, comments and shares) from your followers. This will increase the reach of your Facebook page, causing it to appear on engaged users’ feeds more often, and earn your page a larger following.

Tracking how well your marketing efforts are working is the first step to acquiring the necessary information to enable you to calculate how sustainable your business is.

What Is Your Cost Per Lead?

Having a regular stream of leads is a valuable measure of the health of a business. A lead is a potential customer who is interested in purchasing a product or service from you. Leads can be either cold or hot; a cold lead is a person or entity that needs more convincing to purchase, while a hot lead is a customer who is almost ready to purchase. Needless to say, a cold lead must become hot before they’re going to buy — therefore, a hot lead is more valuable to your business.

Your cost per lead can be found by dividing your marketing spend by the number of leads you received that became interested because of that particular marketing initiative.

When it comes to leads and their value, conversion rate is another metric you need to consider. Not all leads turn into sales, so we need to figure out how effective your sales process is by determining how many leads convert into customers.

For example, if you get ten leads per month and three of those leads turn into sales, then your conversion rate is 30%. If each of these sales generates $1,000 for the business, then for every ten leads, you generate $3,000.

That makes each lead worth $300, so your business can spend up to $300 per lead generated and still be profitable. However, discretion is needed when considering expenditure versus profit.

How to Calculate Customer Lifetime Value and Acquisition Cost

A metric crucial to understanding the long-term sustainability of your business is your Customer Lifetime Value (CLV). In other words, how much a customer spends with your business for the duration of their time as a customer. For example, if they spend $20 a month with you for 12 months and then never return, then their CLV is $240 (20 × 12 = 240).

Another metric related to CLV is Customer Acquisition Cost — how much it costs your business to turn a potential customer into a customer. If for every $1,000 spent on marketing, your business gains 25 customers, then your acquisition cost is $40 per customer (1000 ÷ 25 = 40).

If each customer spends $240 with you and it only cost you $40 to gain that customer, then there is $200 left over. Providing you have enough customers to cover your expenses with that left-over $200 per customer, your business is sustainable — you’re in the black!

So, what’s the difference between Cost Per Lead and Acquisition Cost? Simply put, the former is the amount spent to gain the attention of a potential customer that will take further resources to convert into a customer. The latter measures how much was spent per actual customer gained.

Customer Acquisition Cost per channel is the cost to your business of gaining one customer via each of your marketing channels. We measure this because it may be costing more than it is worth to gain customers through AdWords, for example. In this case, you would invest less money (or none at all) in AdWords campaigns to instead use within your more effective channels.

Use tools such as Google Analytics to see where your customers are coming from and compare these numbers with how much money is being spent on each channel.

Now that we have explored these metrics in more detail, we need to begin applying that knowledge to your business. How do you find your numbers? That’s coming up next, so hang on to your hats!

How to Assess Customer Retention

It can be difficult to determine exactly when a customer decides to move on to a competitor or that they no longer require your goods or services. Depending on the type of business, there are different methods for measuring this.

Retailers and hospitality organisations will often use loyalty cards to track how often a customer spends money on their business. Other companies use monthly subscriptions to determine customer retention, simply by comparing subscription start and end dates.

If neither of these are viable options for you, below is a formula you can use to determine your customer retention rate.

First, take the number of customers at the end of a period – “A” (a month, quarter, six months or a year) and take away the number of new customers you gained during the same timeframe – “B”.

Then, divide that number by the number of customers you had at the beginning of that period – “C”. Multiply that by 100 for your customer retention percentage.

In short, the formula is: ((A – B) ÷ C) × 100 = your customer retention rate.

Cheat sheet

  • Cost per lead = how much you spend to acquire 1 lead
  • Customer acquisition cost = how much it costs your business to turn a potential customer into a customer
  • Conversion rate = the percentage of leads that convert into customers
  • Customer lifetime value = how much a customer spends with your business for the duration of their time as a customer
  • Customer retention rate = how effective your business is at retaining customers

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