Importance of KPIs
Tracking the Key Performance Indicators (KPIs) of your business is essential for having a complete understanding of it. Tracking KPIs effectively enables you to monitor the health of the company, recognize problems/ opportunities, and analyze trends. This leads to more informed decision-making and a higher likelihood of achieving the business’s growth goals.
Note: For the sake of clarity we chose not to include income statement metrics such as revenue, profit, profit margin, and EBITDA as part of this list of KPIs. Though these metrics are good indicators of your business’s financial performance and should not be neglected.
Let’s talk about which KPIs are the most important and why.
Cash Flow
Cash flow is a simple metric but very important. It can be described as the difference between cash coming in and cash going out.
It’s important to have a clear idea of the cash flow of the business because having cash is what allows you to invest in growth approaches. If the business doesn’t have sustained positive cash flow it likely won’t succeed. Growth initiatives and investments need to be weighed against cash flow.
Having sufficient cash flow and cash-on-hand enables you to take advantage of growth opportunities – whether planned or presented in the near term. For example, building an additional product feature driven by your target market. It’s beneficial for growth to spend on product development, implement that feature, and capture that market share from competitors.
Sales Cycle
The sales cycle is the amount of time it takes for a sale to occur, from start to finish. This metric is typically viewed as an average of the time it took for all sales, but should be aggregated by the type of sale or product being sold.
Understanding how long it will take to complete a sale allows the business to accurately estimate future revenue and plan expenses.
When you have a solid understanding of your sales cycle you can then start to make strategic decisions about investment, such as new hires, evaluate the performance of your sales team, and begin to understand the level of effort that goes into selling each offering.
Growth Rate
Growth rate is another relatively simple metric but crucial nonetheless. The growth rate is the percentage you have grown compared to the last period. It can be calculated for revenue, profit, the number of employees, or any other metric you wish to continually track. And can be represented at multiple levels of granularity: yearly, monthly, weekly.
It’s important to determine if you are meeting – and are projected to meet – growth goals. Growth rate is of particular interest to potential investors. Talented employees are attracted to high-growth organizations; if you manage your growth properly your company will develop a strong culture.
By analyzing trends you can see where improvements need to be made. If you see a dip in revenue growth during certain months every year you can decide to have a sale or increase marketing leading up to that period.
Conversion Rate
Conversion rate is the percentage of customers who made a purchase, out of those who interacted with the company, generally over a certain time period. It represents the effectiveness of a company at pushing a potential customer through the sales funnel.
Conversion rate is an indicator of product-market fit. A very high conversion rate may indicate that pricing is too low or that the company is underbidding and sacrificing profitability. Too low of a conversion rate may indicate the opposite issue with pricing or even an issue with the fit of those who are interacting with the company.
Decisions around pricing, and more broadly the product-market fit, are complicated and nuanced. Looking at conversion rate as a measure of the health of pricing accuracy contributes to good long-term decisions about the viability of each offer.
Customer Acquisition Costs
Customer acquisition costs (CAC) are the average marketing spend to obtain a new customer. It can be simply calculated by dividing money spent on marketing activities by the number of purchasing customers.
CAC is integral for calculating ROI on a marketing initiative and determining the most efficient methods for marketing and sales.
By understanding CAC for your business, and comparing it to industry averages, you can identify and remedy ineffectiveness in your marketing activity. You are also able to use this information to calculate and plan the necessary marketing spend to meet growth goals.
Customer Satisfaction
Customer Satisfaction (CSat) is the level of happiness -or, satisfaction – customers feel with regards to the business’s product or service. There are multiple methods to gauge customer satisfaction. Commonly, customer satisfaction is determined by surveys or reviews.
It’s important to track CSat because listening to the customer allows you to understand their perspective on what they like and don’t like about your product. CLTV and Churn Rate are both reliant to some degree on customer satisfaction. Grasping these metrics contributes to your overall understanding of how the market is responding to your company and/or product.
With this information, you can improve your product and handle issues with critical customers. When you know what worked and what didn’t you can adjust and stay relevant. Ensuring that existing customers are happy is critical and a great way to pave the way to additional customers.
Customer Lifetime Value
Customer lifetime value (CLTV) is the average revenue per customer over their lifetime. When a customer has a good experience with a product or service they are more likely to buy from that company again, which increases CLTV.
Since selling to existing clients is a more cost-effective way to increase topline revenue compared to acquiring new customers, every business should be monitoring and working to increase CLTV. This is the most cost-effective way to expedite growth. Additionally, having an understanding of the lowest CLTV customers brings an understanding of where NOT to focus company resources.
Choosing to focus on high CLTV – even at the expense of low CLTV customers – can be a gut-wrenching decision for many business leaders. Every business has a subset of customers who drive the highest revenue and another subset that may very well be more costly than the revenue they provide. Having a clear metric that quantifies the value of each client is a start on deciding how to best spend valuable time and resources. CLTV also has the potential to provide insights into the profiles of prospects that should be pursued in the broader market.
Customer lifetime value can be compared with customer acquisition costs to find the CLTV:CAC ratio. This ratio is a good evaluation of the sustainability of the business model. It shows if the average lifetime value of a customer outweighs their cost of acquisition.
Intuitively this makes sense, you don’t want to spend a lot of money to acquire a client which won’t generate profit. There are select circumstances when businesses accept spending more on acquiring customers than they expect to make. But for most businesses, this is a risky approach and for all businesses, this is a short-lived tactic.
Churn Rate
The churn rate is the rate of customers who stop doing business over a certain period. It can be calculated by dividing customers lost in a period by the total number of customers at the start of the period.
Measuring a churn helps businesses understand trends in customer numbers, which is a major factor in anticipated revenue. Being able to spot issues with the customer base, as a downward trend would indicate, is critical in any company’s growth strategy.
Additionally, changes in the churn rate may indicate a major change in the market such as a competitor picking up market share as a result of a popular new offering or capability.
Having a grasp on your company’s churn rate allows you to see if you need to make adjustments or pivots based on how your product or service is being received by the market.
Summary – 8 Essential KPIs For Growing Businesses
By understanding these 8 essential KPIs for growing businesses, you now have the foundation to leverage critical data in your decision making and planning for growth. Not only will you now have a better vision of your company, but you now will have a better vision for how to take it to the next level.
