Running a business can be challenging. From your inventory and finances to competition, market trends, and customer satisfaction, there are a million things you need to keep track of to ensure that your organisation is heading in the right direction. But with how hectic it can be to run a small business, it's often easy to miss the big picture of your organisation's overall performance. Is it improving, stagnating, or worse—declining in growth?
What is a Key Performance Indicator (KPI)?
Key Performance Indicators are quantifiable measurements that help evaluate how well your business is performing. They can be used by companies of any size to evaluate different areas of their operations over a period of time. As long as there is enough data gathered, these KPIs can give you insight into yearly, monthly, and even daily performance trends in your organisation.
In this post, we're discussing five important KPIs that are essential to helping you assess the progress of your small business. When you analyse these indicators on a regular basis, you can identify what works for your business and what doesn't. This gives you more flexibility when making organisational improvements and allows you to craft stronger long-term strategies. However, bear in mind that the way you calculate these metrics may vary depending on your business's size and the type of service you offer. We've tried our best to explain their concepts with simple formulas that most businesses can relate to.
1. Return on Investment (ROI)
Return on investment is the amount of money you earn in return for an investment you made. That investment can be a person, a new software program, machinery, a marketing campaign, or anything that can potentially grow your business. The purpose of this metric is to determine the effectiveness of a particular business move by measuring how profitable it was in the long run. For example, let's say you spend $5,000 to set up billboard ads across Brisbane to promote your construction business. After few weeks, you discover that leads from those ads generated $20,000 in revenue, resulting in a profit of $15,000. To calculate your ROI, you'll divide the profit earned by the total cost of investment.
$15,000 (Profit earned)
——————————— = 3
$5,000 (Cost spent)
This means every dollar you spent gave you $3 back.
2. Customer lifetime value (CLV)
It helps to keep track of specific customers and their journey with your organisation. Customer lifetime value is the revenue you expect to generate from each customer during their relationship with your business. This metric can be used to decide on how much you need to pay to acquire and retain a customer, but it can also give you insight into where to spend that money. For example, if you spend $800 on direct marketing for your clothing boutique, and gain a customer whose CLV is $700, then you're incurring a loss. What this tells you is that pouring more money into those direct marketing strategies is not going to give you the returns you want. Instead, it would be better to focus on building a better relationship with the customer to encourage them to purchase from you more.
3. Conversion rate
When you manage a business, you can't simply assume that one strategy works better than another unless you have the numbers to back it up. Conversion rates reflect how many of your customers are taking action toward a goal you set, whether that's making a purchase or signing up for a newsletter. This is a direct indicator of how well your marketing and sales strategies are performing. Depending on your organisation's needs, you can measure the conversation rate in a variety of ways. Assume that you've sent a freshly designed email to 80 customers inviting them to a webinar, and 30 have responded positively. Then you can find your conversion rate (38%) by dividing the number of people who've signed up by the total number of people who saw that email. This is great to use in combination with A/B testing. If an email with a specific colour scheme or headline converts better than others, you can replicate it for the rest of your campaign.
4. Net promoter score (NPS)
Customer satisfaction is crucial for any business to thrive, and that's why you must have a way to measure how happy your customers are with your business. Net promoter score does this, and it's also a good measure of a customer's loyalty to your organisation as well. The data is commonly gathered by asking customers how likely they are to recommend your business to their friends and family on a ten-point scale, with 0 being highly unlikely and 10 very likely.
9 - 10
7 - 8
0 - 6
You can determine your NPS by subtracting the percentage of detractors from the percentage of your promoters. The final value can help you identify how well you are encouraging brand loyalty, and allow you to work on offering better support to the detractors who are on the verge of leaving your business.
5. Customer churn
Your revenue decreases with every customer you lose. Considering that it's five times more costly to bring in a new customer than to retain one, you must take every possible measure as a small business owner to keep your existing customers. By knowing your churn rate, you can find how many customers stopped doing business with you in a given period. After that, you can piece together what went wrong and why you weren't able to sustain enough customer satisfaction to keep people from leaving or choosing competitors over you. For example, say you had 50 customers subscribing to your laundry service at the beginning of the month, and that number dropped to 46 at the end of the month. You can calculate the churn rate (8%) by dividing the number of customers you lost from the number of customers you had at the start. Keep in mind that churn may not always be due to something you did wrong. It could be related to the time of year, the economy, or other forces that are out of your control. That's why it's important to track this over a long period of time and not make hasty assumptions based on short-term data.
Every business is different, and not every metric will be important to your organisation. That said, these five tend to be among the most common for determining business performance over time, regardless of your industry. In addition to the five we've listed, there are hundreds of KPIs that can help you further evaluate your specific business's performance. Choose the ones relevant to your goals, find the best ways you can put the data to use, and take actionable steps to ensure that your business can sustain itself in today's evolving business environment.
If you're looking to make this process easier, check out Zoho Analytics, our easy-to-use data analytics software. It can gather your business's data from a wide range of sources, allow you to keep track of your KPIs, and create functional reports and dashboards within minutes.