63. Vanity? Sanity? What about Cash? – Seeing the wood for the trees

Your businesses success can only be determined when you measure things – anything from the number of customers you have, your turnover, or the success of your sales team. The right things are known as your Key Performance Indicators (KPIs). If you measure the right ones for your business, you’ll be in control of your business and spot ways to improve and grow.

The biggest problem is that many businesses measure the wrong things and therefore fail to spot innovative ways to improve; as well as, by the way, managing the wrong things.

So here is our list of 5 common KPIs and which organisations they are best suited for:

Number of Customers: This is a very basic KPI that will tell you very little and offers poor direction. That is unless all your customers pay a similar amount at regular intervals (for example by subscription). However, this can often be used to help determine other more useful KPIs such as customer churn, retention or average spend.

Good for: Subscription businesses, Software as a Service businesses.

Bad for: Most others.

Customer Retention: This determines how many of your customers are returning to use your services again. The flip side is known as customer churn. This is important for your business because those who leave your business need to be replaced, to cover your fixed costs – for example, marketing and sales. Retail giants like Starbucks use retention as a KPI. Poor customer retention can be a sign that your business isn’t offering value for money or good service and needs to be promptly addressed.

However, if you manufacture products and sell through a third party, it can be hard to extract meaning from this metric as there is no way to determine whether the customers are displeased with your product or the seller they bought it from.

Good for: Retail, hospitality, businesses that service customers regularly.

Bad for: Manufacturing, those that deal with customers irregularly (i.e. funeral , lawyers).

Turnover / Revenue: This is the basic KPI that almost every business measures. It is the amount a business collects from sales. While it is useful to see the growth of revenue, there are certainly some issues that make this effectively mute. Turnover does not tell you how profitable (or not) you are. So you might make £400 million in revenue, but after costs are deducted, you are left with only £1 million. Therefore turnover doesn’t really tell you much about the business’ financial performance.

Some measure revenue growth – comparing one sales figure to the previous period’s performance. A positive value will indicate growth. Negative will indicate a loss in revenue.

Good for: Assessing if the business is growing – i.e. generating more sales.

Bad for: Assessing if the business is making a decent profit.

Gross Profit: This KPI can be very useful for your business. It is calculated by taking the value of sales and deducting the cost to produce the goods or service. Gross profit does not include overhead cost (for example, wages or marketing) but it does demonstrate the success of your pricing strategy and whether or not you need to consider increasing or decreasing your prices.

Good for: Almost all businesses.

Bad for: No one – even not-for-profit organisations.

Customer Acquisition Cost: This is the amount it costs to generate a sale. This figure is often an average and can be used by numerous businesses. However, it is best suited when you have customers who regularly purchases roughly the same amount. It can help you to determine if you are setting your prices correctly by comparing this value to the lifetime value of your customer.

Good for: Subscription businesses, regular purchasing businesses.

Bad for: Infrequent use businesses.

These are some of the main KPIs; there are many others available too and the secret is to identify the right ones for your business. They include:

Conversion rate – The rate at which enquiries and leads are converted into paying customers. Good for identifying ways to optimise your web copy or sales techniques.

Relative market share – Determining your market position. This can be hard to determine if you don’t have accurate industry information.

Net profit – Simple and easy to calculate, all your revenue, minus all your expenses. Easy for determining whether profit is being made or not.

Net profit margin – This is calculated by taking the net profit and dividing it by the revenue. The higher the number, the better your performance. Each industry has a specific range for their standard profit margins.

Return on investment (ROI) – An important metric when you’ve made a cash investment in a business. Take the money generated from an investment and divide it by the amount invested. This will tell you how much money has been made for every pound you invested.

Conclusion

If you want to be a success in business you need to regularly be measuring your organisation’s key performance indicators. That way you will know when something is wrong and just where you need to focus your attention to make improvements.

Call the Tectona Partnership today about which KPIs are right for your business and how you should be monitoring them.

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