Five Metrics Any Small Business Should Pay Attention To
Sales figures, inventory tracking, customer retention, ad performance — as a small business owner there are countless metrics and statistics you’re expected to track.
While each measurement serves a unique business purpose, having too many metrics can be overwhelming. To avoid “paralysis by analysis,” you need to identify which metrics are the most important to track and measure.
To help you filter out the noise, Credibly have pulled together a list of five critical small business metrics to track, how to track them, and why they’re important.
Cost of Revenue
Sales is the lifeblood of business, and having a true understanding of your revenue metrics and KPIs can help you more effectively generate and manage your cash flow.
But it isn’t enough to just increase your overall sales numbers — you need to keep an eye on your cost of revenue if you wish to see an increase in profit.
Cost of revenue is a measure of the total expense required to make a sale. It’s the cost of the goods you sell plus the sales and marketing costs you incur to sell them.
Often times, business owners get so caught up in increasing their top-line sales that they don’t realize how much profit they’re leaving on the table by not aggressively reducing their expenses wherever possible.
Related: Understanding Prime Cost — The Simplest Way to Give Yourself a Raise
Before you stare down another sales chart, figure out how much you spend to make a sale, on a per-product basis. Then, come up with a plan to reduce your costs — whether that means renegotiating with vendors, cutting back on inefficient marketing channels, or getting rid of products or services that just aren’t profitable.
Customer Retention Rate
To most businesses, the only thing more valuable than acquiring new customers is making sure the old ones stick around. In fact, studies show that it costs anywhere from five to 25 times to attract a new customer than it does to retain an existing one.
Customer retention rate tracks the percentage of your customers that continue to buy from you over a given time period. It’s a measure of loyalty that directly translates into profit. According to invesp, a 5% increase in customer retention can increase profits by 25-90%.
Here’s a simple way to calculate customer retention rate:
Retention Rate = ((CE-CN)/CS)) X 100
CE = number of customers at the end of a certain time period (one1 year, for example)
CN = number of new customers acquired during the same time period
CS = number of clients at the start of the time period
Keeping your retention rate at a high level will decrease expenses (as you’ll wind up spending less on customer service and acquisition costs), while increasing your brand equity and word-of-mouth awareness. In addition, tracking retention rates gives you a better idea of how many new customers you will need in order to grow year over year.
Some quick tips for improving your customer retention rate:
- Many businesses follow the 80-20 rule. 80% of their business comes from 20% of their customer base. Do everything in your power to retain your VIP customers.
- Ditch discounts and special offers for an addictive customer loyalty loop.
- Schedule time for your customers: offer more of what they like and address their pain points — complaint handling is an ideal avenue for business growth.
Website Conversion Rate
Whether you use a website to sell products online or simply inform customers of your services, traffic stats can tell you a lot about your brand awareness and the effectiveness of your advertising and SEO efforts.
Website metrics like monthly visitors, number of pages per visit, bounce rate, and time on site will provide a better understanding of how users interact with your site, and help you identify room for improvement.
But make no mistake: There’s only one website metric that really matters, and it’s your conversion rate: the percentage of your businesses website visitors who either make a purchase (for retail sites) or take another desired action like filling out a contact form or downloading marketing content.
If you can’t compel a website visitor to take an action on your site, all your traffic stats are just vanity metrics. Focus on fine-tuning your website messaging and CTAs so that visitors are funneled to pages where they’ll convert. If you find that a lot of your site visitors are dropping off at certain pages, it’s a good sign that those pages need a better expression of your product or service’s value, or a friendlier touch.
You may find that a few specific pages result in the majority of your conversions, or that specific referral sources provide the highest paying customers. Google Analytics can help you track all of these metrics and much more. Check out Google support for easy tips to get started.
Operational productivity is a general metric that describes the ratio between the output of your business efforts and the input required to achieve those results. (i.e., Units of output / Units of input).
While operational productivity requires a bit of math, it’s a reliable measure that can be applied to nearly every aspect of your business. Optimizing for productivity will increase organizational efficiency, no matter the size of your team.
For example, you could divide your monthly sales revenue by the number of salespeople to gauge how productive their month is. Or, you could simply divide the number of goods produced in a day by the number of cumulative labor hours it took to create it.
The idea is to come up with a metric that’s easy to calculate and compare to previous dates. Harvard Business Review has developed some time-tested formulas for calculating productivity across a range of industries. We’ve also provided a few additional tips to help you extract better insight:
- Productivity KPIs should be measured against internal benchmarks rather than industry or regional baselines.
- Remember, improving productivity is not all about increasing output. Decreasing input variables is often easier and more effective.
- Gamifying operational productivity is a win-win for all stakeholders.
Obviously, inventory data is more applicable to some businesses than others, but any serious small business will have inventory of some sort. Careful inventory management is a key for sales success, cash flow management, reporting, and overall profitability.
From the goods you’re selling to supplies in the kitchen and everything in between, the need for inventory accuracy is critical to small business success. Tracking your inventory levels as frequently as possible maintains reporting accuracy and helps you identify valuable insights, such as
- Top sellers
- Areas of loss (storage, in-store, etc.)
- Seasonal trends
- Opportunity cost of each additional product
The last bullet is critical. If certain products take up too much physical room and are not selling, you may be better off warehousing or liquidating the item to make space for more profitable products. Implementing the right changes will boost profitability and simplify your business model.
While calculating inventory is rather manual, it isn’t difficult. This article from Small Biz Resources can help you get started understanding which measurements are most important to start with. From there, you can modify the metrics to track the insights that are most important to your business.
Maybe you’ll uncover that you need to improve inventory management during the busy season. Or perhaps you’ll want to crack down on retail theft. Regardless, a clear understanding of your inventory levels will help you identify major business improvements while contributing to more accurate planning, budgeting, and forecasting.
Of course, this is just the tip of the iceberg for many small businesses, but with these metrics in mind, you should get a much better idea of where you are, where you’re going, and how to continue growing from there.