4 key metrics your business depends on

Effective business management these days is impossible without analyzing and using key metrics. Metrics allow you to predict trends, make informed decisions, and succeed in a dynamic environment.
In this article, we'll look at four key metrics your business depends on and how to use them to achieve outstanding results.

What are process metrics

Process metrics are numerical or qualitative measures that allow us to assess how well a particular business process is functioning. They can vary depending on the goals and characteristics of your business, but the main thing they do is give you an objective picture of what is happening in your business. Remember: you can't manage what you don't measure.

CAC - cost of customer acquisition

Let's start with the first metric.

CAC (Cost of Customer Acquisition) is the cost of customer acquisition. Every business knows that customer acquisition has a financial cost. However, there are often mistakes associated with understanding this cost.
The first mistake is that many entrepreneurs confuse the cost of customer acquisition with other metrics such as cost per lead or cost per click. This can lead to incorrect calculations and evaluation of the effectiveness of marketing efforts.
The second mistake occurs at the stage of calculation from the series, counted all the money for advertising and divided by the number of customers.

In fact, the cost is much higher. Because you have to include all costs, including marketing budget, salaries, software and possible additional costs.

It turns out that if you spend 200,000 per month on advertising and attracted 4 clients, the cost is not 50,000. Because you spent on salaries another 200 000, on software another 50 000 and additional costs 50 000, in our case it is for example the evaluation of the TOR from the client. Total 500 000 was spent on 4 clients, it turns out that each costs us 125 000. The math is completely different)

LTV - customer value

LTV (Lifetime Value) is a metric that shows how much money a company can make from a single customer over the entire time they do business with it. Often people think that LTV simply equals the average check multiplied by the frequency of purchases. But this is far from always the case.

Let's say you have a client who spends 20,000 monthly and has been working with you for 2 years. In this case, the LTV formula would look like this:

LTV = (20,000×12 months) x 2 years = 480,000.

Seems like a simple calculation, right?
But there are pitfalls that are often overlooked.
We don't account for additional factors such as seasonality, changes in average check and customer churn.

For example, if you have 5% customers leaving every month, your real LTV is already lower. You should also consider the cost of customer retention, which may include discounts, gifts and support costs.
This includes not only the monetary component, but also your team's time.

This is similar to the situation with calculating the cost of customer acquisition, isn't it?
Simply dividing the total costs by the number of customers can result in an overstated or understated figure.
In this case, if the cost of retaining a customer was 50,000 over two years, the real LTV would be 480,000 - 50,000 = 430,000.

ARPU - average revenue per customer

Our next stop will be ARPU, or average revenue per user. This metric is important for both digital and classic businesses. It helps to estimate how much money each of your customers brings in on average over a certain period of time.

To calculate it is quite simple:
total income for the month (or other selected period) is divided by the number of active clients.

Let's say your total revenue for the month was 2 million and you have 10 active clients.

ARPU = 2,000,000 / 10 = 200,000.

It is important to remember that ARPU provides us with information about the current situation and may not always fully reflect the real picture.
Often additional customer segmentation is required, as different services or business segments may have different average checks and revenue per user.

For example, we have project development, hourly development, support, and specification development. Each service has a different average check and different revenue per user. Therefore, we count both one total and for each segment.

Average revenue per customer is useful, especially when you need to quickly assess how well your business is performing in terms of profit.

CR - customer share

Churn Rate (CR) is a metric that often goes unnoticed, yet is hugely important because it reflects the proportion of customers who have left you over a specific period, such as a month. This metric serves to assess the sustainability of your business and the length of time customers have interacted with you.

How to calculate it?
Let's say at the beginning of the month you had 100 clients, and by the end of the month there were 95. So, the churn amounted to 5 clients. A simple formula looks like this:

(5 / 100) x 100 = 5%.

However, as with other metrics, this indicator has its own peculiarities. It can be calculated differently in different industries.
In addition, it does not always provide a complete picture if the reasons for outflow are not taken into account.

For example, your company may have different types of projects: short and long-term, and churn may be higher in short projects because of their temporary nature. Therefore, we analyze the churn rate both for the whole company and for each type of project separately.

In fact, these 4 top-level indicators cover all the activities of the company. That is, customer value shows the work of marketing and sales, life cycle shows the processes of customer development, average profit per user shows the level of production, and the churn rate shows the level of service quality. Then apply with other metrics such as customer satisfaction, advertising costs, transaction terms, depending on business goals.
It is important to avoid excessive number of metrics and focus on their contribution to business goals.

Our example

At Sailet, we used three key metrics: revenue, margin and customer satisfaction. They play an important role in evaluating the performance of our business and helping us make decisions.

Revenue allows us to measure the success of our marketing and sales efforts. An increase in revenue indicates that we are attracting more customers and increasing sales.

Margins, on the other hand, show how effectively we manage costs and evaluate production processes. If revenue is growing but margins are declining, this may indicate inefficient production planning or estimation. In such a case, we can take measures to optimize processes or implement new estimation models.

Customer satisfaction helps us understand how well we are doing our job and meeting customer expectations. If it is declining, it may indicate a problem with the quality of a product or service or a failure to meet customer expectations. This may be a signal to us that we need to make changes to our processes or customer interactions.

It is important to note that these metrics are interrelated. For example, if our goal is to increase the number of new customers, but attracting each customer increases the cost per transaction, this can have a negative impact on margins. Therefore, we also track metrics related to customer acquisition costs and return on marketing investment.

All of these metrics together help us get an objective picture of the state of our business and make the necessary adjustments to achieve our goals.

Narrow metrics in different niches

Different business industries have unique metrics that help evaluate the effectiveness of processes. Let's look at a few examples of such metrics:

1. Pharmacy chain:

Metric "waiting time at checkout"
Increased wait times at the cash register may indicate problems with staff productivity or cash register equipment. This can negatively impact customer satisfaction and repeat purchases. Analyzing this metric can help identify and correct problems in a timely manner.

2. Beauty Salon: 

Job occupancy metric
This metric measures the efficiency of workstation utilization in a salon. Low occupancy can indicate sub-optimal scheduling or marketing issues. Improving this metric can help increase revenue and improve overall salon performance.

3. car service: 

Metric "average vehicle repair time"
If the average repair time is increasing, it may indicate equipment problems, a lack of skilled labor, or inefficient work processes. Tracking this metric can help identify performance bottlenecks and improve service quality.

4. Fitness Club: 

Metric "group attendance"
Low group class attendance can indicate classes that are not interesting to clients or schedules are inconvenient. Analyzing this metric can help you identify popular classes and optimize your schedule, increasing customer satisfaction and group class revenue.

5. Travel agency:

Proposal-to-sales conversion rate" metric
This metric reflects the success of turning agency proposals into actual sales. A low ratio may indicate poor quality proposals or insufficient outreach. Working to improve this metric will lead to increased sales and customer satisfaction.

These examples demonstrate how different metrics can be applicable to different businesses and how they relate to different aspects of a company's operations.

Using metrics to improve processes

It's important to note that setting up metrics is only the first step. The key is to use the data collected to continuously improve your processes. If you notice that some metric is deteriorating, you need to find the cause and make adjustments to the process. Analyzing metrics will help you identify bottlenecks and optimize your company's performance, which will lead to increased efficiency and achievement of your goals.

Conclusion

Setting and tracking process metrics is the key to successful business management. It allows you to have a clear picture of what is happening in your business and makes it possible to make informed decisions. Feel free to experiment with different metrics and methods of tracking them to find the most effective ones for your business.

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