Data, metrics, analytics… call it what you will. What most of us have in common, however, is a lack of understanding and interest in business metrics. The key here is most of us—some folks are already doing a great job of tracking their business performance and love getting their hands on fresh data. That said, there are a lot of small business owners out there who avoid their metrics, don’t know which to track, and frankly don’t understand how to read the story the numbers are telling.
If you’re a member of the latter, it’s time to start paying attention to your metrics. Having a solid understanding of your business performance can help you make strategic decisions and put you on a path to success. So, let’s dive into five essential small business metrics you need to know.
Let’s start simple. Net profit is all of your revenue minus all of your total expenses. Be sure to factor in all of your expenses, such as interest, operating expenses, and even taxes. Net profit tells you two things: whether you’re making enough money to cover your expenses, and if you’re on track to meeting profit and income goals.
Customer Lifetime Value
You know me—I’m always talking about working with the right type of clients, rather than wasting time and energy on bad-fit clients. That’s partly because it protects your mental health and business reputation, but also because of customer lifetime value. When you work with good-fit clients, your average customer lifetime value skyrockets. They spend more, and they work with you longer. Here’s a quick formula for this one:
LTV = (average purchase value) x (number of purchases in 12 months) x average length of the customer and business relationship (in years)
Customer Acquisition Cost
This is another super important one. Do you know how much it costs to acquire new customers? To find out, you’ll need to account for all of the marketing costs you accrue over a period of time and divide that by the number of new customers you generated over that same period. The formula looks like this:
CAC = (sales expenses + marketing expenses) ÷ number of new customers
This metric can be tracked easily with a tool like Google Analytics. You really want to know how many people are visiting your site because it can help you understand whether you need to invest in things like content, SEO, or advertising to get more users on your site. Look at overall sessions, unique sessions, and new visitors. This metric will also play a vital role in calculating your next metric—conversion rate.
This is a simple measure of how many leads, or prospects, become customers. This is measured in different ways depending on your business structure. If you sell products online, you could measure this by looking at the number of people who made a purchase during a period of time, compared to the number of people who visited your online store. If you had 500 purchases and 10,000 unique sessions in a month, your conversion rate would be 5%.
Metrics can be intimidating—and even a bit boring—at first. But the reality is, they’re critical to your long-term business success. Start tracking these five metrics to get started and they will help you identify strengths, weaknesses, and opportunities in your business you may have never realized otherwise. If you’re looking for more guidance, we have some metrics experts over at The Boardroom League who can help you get started with business metrics!