It can be hard to tell exactly where you stand in the early days of running a new or growing business. It’s easy to assume that you’re successful just because you’re busy, or panic about failure because you’re not as busy as possible.
There are all kinds of information that you can (and should) be collecting and reviewing. The point of this list isn’t to permit you to ignore those other metrics, it’s to give you a clear action plan for the areas you should be prioritizing above all else.
We call these items Key Performance Indicators or KPIs. Here are the four that are most important for measuring the success of your business.
Customer Acquisition Cost
Customer Acquisition Cost, often abbreviated to CAC, is the amount of money you’re spending to attract and land each new customer. Some customers come easier than others, so this is the average cost overall.
You calculate your CAC by selecting a time frame, add up all marketing and sales expenses for that time, and dividing by the total of new customers you brought on. This time frame can be anywhere from a week to a full fiscal quarter, depending on your business’s nature.
If you have a short sales cycle or most of your marketing and sales expenses come from salespeople and other personnel, you should be using a shorter time to calculate your CAC. If you have a longer sales cycle or get most of your business from trade shows or long-running marketing campaigns, a monthly or quarterly CAC calculation may give you more useful data.
Your CAC should always be lower than the average lifetime value of your customers.
One way to make sure this is the case is by decreasing your CAC. Numerous factors can be contributing to your CAC, including your sales team’s close rates, sales pipeline efficiency, and marketing campaign efficacy. You may have to do some digging to find out exactly where the problem is if your CAC is much too high.
The other way to balance the equation is to focus on:
In general terms, retention is how many of your customers stick around. Exactly what retention looks like can vary with the nature of your business. Suppose you’re selling a subscription of some sort. In that case, retention will be based on how many customers continue that subscription into the second month (or year, depending again on your business model).
If your business sells a product or service that (theoretically) only needs to be purchased once, retention is based on how many customers make a second purchase.
Retention also refers to the duration of the customer relationship and whether they make a second, or third, or fourth purchase (or continue their subscription for additional months or years.)
Duration of retention is also necessary, but most customers who do not continue with your company will drop off after the first month/purchase, so retaining from the first purchase/renewal to the second is the most crucial.
Month to Month Growth
To clarify, focusing on month to month growth does not mean ignoring your quarterly or annual growth numbers. You should be looking at your month to month growth in addition to those metrics.
Also, focusing on month to month growth can mean looking at several different figures. You can track your customers or revenue month to month, or you can look at some of the factors we talked about previously, like your retention, CAC, or sales team and pipeline efficiency.
Focusing on month to month growth is helpful for two reasons. First, if you’re a new business, you will not have figures from previous years, or even previous quarters. Looking at month to month growth gives you information that you can work with much sooner than going by quarterly or annual metrics.
Secondly, if you are growing rapidly or experiencing other drastic changes, looking at month to month numbers can give you a more complete picture of how your decisions affect your business.
One important note: if you’re going to look at small-scale data like monthly or weekly numbers it’s essential to keep it in context and remember the big picture. If you’re only focusing on short term growth, you might get spooked over major investments or ad campaigns that take a while to pay off.
Revenue Growth Rate
It goes without saying that in order for your business to grow, you need revenue. More importantly that revenue needs to be continually increasing. So, the final KPI (Key Performance Indicator) that you should monitor as a growing business is your revenue growth rate.
Unlike some other KPIs on this list, revenue growth is best measured on a quarterly basis, although you can measure it monthly or annually as well.
Simply take the total revenue from the previous quarter and subtract it from the current quarter’s revenue. For example, if your revenue from the previous quarter was 1 million, and this quarter it was 1.2 million then it would be a difference of 200 thousand.
Then, divide the difference (in this case 200,000) by the previous revenue’s quarter (1 million), which will give you the revenue growth rate. In this case it would be .20 or 20%.
Despite this simple calculation, there are dozens of factors that affect your revenue, so increasing it is much more involved. Monitoring your Revenue Growth Rate is simply the best overall picture of whether your company is succeeding or failing.
Starting and running a successful business is an incredibly involved task, and you’re required to be involved with hundreds of decisions a week. It can be easy to lose sight of the big picture, but if you focus on these for Key Performance Indicators you’ll be able to stay grounded, and make the right decisions for your new or growing business.