5 Key Performance Indicators (KPIs) to Keep a Pulse on Your Business
As a business owner, things are usually more straightforward when you’re just starting out. You know where every dollar is going, you are intimately connected to your customers and you can manage most matters in your head or with a simple task app. However, once you start to scale everything changes and it changes quickly. The key to staying ahead of the curve is to make as many optimal decisions as possible along your growth journey.
We now have real time information and connected technologies to manage our data. As a growing business you should have specific non-financial and financial KPIs (Key Performance Indicators) that you should follow to enhance your decision making. Here are 5 KPIs that should provide you with a better pulse on your business:
1. NET PROMOTER SCORE (NPS)
NPS is pretty simple. You ask your customers on a scale of 1-10 how they really feel about you. The reason why it is so powerful is because it takes your customers very little time to answer the question, which enhances the probability that they will actually respond. In addition, since it is such a rapid decision, you are more likely to get the customers instinctual answer (i.e. We are too busy to sit and overthink how to answer such a basic question).
Tip: Make sure to define an acceptable benchmark (i.e. A score of >=8). If you receive a response below the benchmark, contact your customers and find out where you can improve.
2. CUSTOMER CHURN RATE (CCR)
Formula: Number of lost customers/ Total number of Customers for a defined period.
CCR Is a measure of how many customers you’ve lost within a certain time period. The longer you have been in business, the easier it is to figure your long term average churn.
Tip: It may be helpful to have an exit interview with your customer if they will allow you to have one. Find out if it is your ideal customers leaving or ones that may not be a perfect fit for your service or product offering.
3. REVENUE PER EMPLOYEE (RPE)
Formula: Total Revenue/Number of Full Time Employees.
The number itself will not tell you much, however, you can use the information to analyze many aspects of your business. For example, if you average revenue per employee is $80,000 and your average full time employee salaries are $105,000, you should be asking why. You could be scaling up your team ahead of growth or it could be an indication of a business model issue. SaaS companies require many engineering and support hires, while service businesses may require many service professionals. In any event, if you are unhappy with the metric you will have to dive deeper.
Tip: Look at ways of increasing revenue without influencing your headcount. It is also important to analyze how efficient your team is at executing on projects to determine whether you are over or under hiring.
4. SALES CONVERSION RATE (SCR)
Formula: Total Number of Sales/ Number of Leads x 100.
For a SaaS business, this KPI can be easy to track by just taking total visits to the website and divide by the total ‘click buys’. However, for a service business, it is useful to track incoming queries in a CRM in order to accumulate the proper data to make the calculation.
Tip: Compare your conversion rate to industry standards to see if you are over or under performing. If you are under performing, make sure to analyze your sales process and figure out if adjustments/refinements lead to higher conversion rates.
5. CUSTOMER LIFETIME VALUE (CLV)
Formula: (1/Customer Churn Rate) x (Total Revenue/Total Customer Count).
CLV Is the average amount of money your customers pay during their time as a customer of your company.
Churn rate - 2%, Total Revenue - $300,000, Total customers - 3,000
CLV = (1/0.02) x (300,000/3,000)
= 50 x 100
TIP: Monitor your CLV over time to spot trends on whether it is increasing or decreasing. This KPI can also influence your pricing strategy as it lets you visualize not just the initial sale but how the total revenue generated over the lifecycle of the customer will influence your business.
The important thing to remember is to organize your data in a way that is easy to extract the metrics and KPIs you desire. It is very important to think about the appropriate accounting software, CRM and other integrated apps being used from the onset to ensure data visualization is easy and seamless. Ultimately the goal of monitoring the above metrics is to help you make better and faster business decisions that will lead to higher revenue growth and profitability.