By now, you know all about KPIs, including how to set and track them. But as a growing business, how do you know what KPIs to pay attention to? With so many to choose from, which ones are most important?
While there’s no straight answer to that question, since the answer will depend on a number of factors, I’ve compiled a list of the eight metrics that every growing business should at least consider.
Towards the end of the post, you’ll see that there are two metrics that software-as-a-service (SaaS) businesses should focus on and two metrics that e-commerce businesses should pay attention to.
Let’s take a look.
1. Cost of Customer Acquisition (COCA)
You know what they say: you have to spend money to make money. While this is true, you want to make sure that you don’t end up spending more than you make.
The cost of customer acquisition is how much you spend on marketing to acquire a new customer. The COCA is completely irrelevant unless you take into account how much money each customer is spending on average. If your business is a car dealership, for instance, and your COCA is $1000, that might seem high at first glance, but since your average customer is spending $30,000, then that’s a pretty good COCA.
One simple way to decrease your COCA is to encourage your customers to refer their friends. And provide them with a tempting incentive to do so, like a freebie or a discount on their next purchase. Do a thorough analysis of each marketing channel to find out which ones have the lowest COCA and then focus your efforts primarily on those channels.
How to calculate: Combine your marketing (and sales) expenses for a given period and divide that by the total number of customers acquired in that period and you will have the cost that it takes to acquire a single customer.
Example: If you spend $20,000 on marketing one quarter, and you have gained 100 customers, then your COCA is $200.
2. Customer Lifetime Value (LTV)
Just as it sounds, customer lifetime value (also known as LTV) is the amount that a single customer will spend at your business over their lifetime. This metric is ultimately going to determine how successful your business will be in the long run.
Do people tend to buy once and never come back? Or do most of your customers come back for more? LTV can also help you better understand your cost of customer acquisition. As long as your LTV exceeds your COCA, then you don’t have to worry.
Suffering from a low LTV? Try improving your customer service. Create remarkable client or customer experiences. Keep your customers satisfied and chances are, they will come back for more.
How to calculate: the average transaction amount multiplied by the number of repeat sales and the average retention time
Example: If your average customer spends $30 a week, then they are spending $1,560 per year (30 x 52). If they tend to stick around for two years, then your average customer lifetime value is $3,120.
3. Revenue Growth Rate
As a growing business, you’ll want to keep an eye on how fast and well your business is growing. Your revenue growth rate, which measures the rate at which your revenue increases (or decreases), is an effective way to monitor this.
How to calculate: Subtract your current period’s revenue from the revenue of the previous period (making sure that the periods are equal in length). Then divide that difference by the revenue from the first period. Multiple that number by 100.
Example: If your revenue for the first quarter was $100,000 and your revenue for the second quarter was $165,000, then you gained $65,000 in revenue this period. Divide what you gained, $65,000, into the previous quarter’s revenue of $100,000 and you get .65. Multiple .65 times 100 and you have a growth rate of 65%. Voilà!
4. Landing Page Conversion Rates
Your landing page is there for one reason and one reason only: to convert visitors to buyers (or leads). If your landing pages aren’t converting your visitors, then they aren’t doing their job—and you need to find out why. Start by checking out this infographic, and make sure that you are following these landing page best practices. Even small tweaks can make a massive difference in your conversions.
So just what should your conversion rates be? According to Search Engine Land, the average landing page conversion rate is 2.35%, but you should aim for it to be higher than 6%. If your landing page conversion rates are lower than average, it’s likely that there is something turning people off in the conversion process.
How to calculate: Take the number of your conversions (or people who took an action on your landing page) and divide that number by the number of total landing page visitors that you received (your traffic). Then multiple that number by 100.
Example: Let’s say 500 people visited your landing page in the past month and only 2 converted. Your conversion rate would be 2 divided by 500, which is .004. Then you would multiple .004 by 100, which equals a conversion rate of .4% (which, needless to say, is extremely low).
5. Number of Active Users (SaaS Companies)
Just as e-commerce businesses will want to focus on sales, software-as-a-service companies will want to keep an eye on the number of active users. This number should continue to grow, or the very least, stay the same from month to month. If your number of active users is dropping, even just a little bit, then that’s a sign that something needs to change.
6. Churn Rate (SaaS Companies)
On that note, your churn rate (also known as attrition rate) is the percentage of people who leave your business.
If your churn rate is high, your business probably won’t last much longer unless you make some changes. Get feedback from your customers about what they don’t like and why they left. Did they find a cheaper alternative? Were they dissatisfied with some part of the service? While you can send out automated emails to gather this kind of information, keep in mind that you’ll have much more success with one-on-one phone conversations (not to mention, this would be a great opportunity to show your customers that you care and maybe even convince them to come back).
How to calculate: Find out how many customers you had at the beginning of a time period (like a month) and then subtract how many you had at the end of that time period. This is the number of customers you lost. Divide it by the customers you had at the beginning of the month. Multiply the result by 100.
Example: If you had 500 customers at the beginning of the month and at the end of the month you have 400, then you have lost 100 customers and the result is 100. 100 divided by 500 equals .20 or a churn rate of 20%.
7. Cart Abandonment Rate (E-commerce Businesses)
Your shopping cart abandonment rate is the percentage of people who add items to their shopping cart and then abandon it before ever making the purchase. If you have a high cart abandonment rate, that could be a sign that your checkout user experience needs to be improved upon. Or maybe it’s something simple, like the fact that your shipping costs are too high (side note: due to the power of free, it’s always better to factor shipping into the cost of your products so that you can provide your shoppers with “free” shipping).
To monitor this KPI, set up Goals in Google Analytics. At the end of the period, you can check out the funnel visualization report, which will show you at what stage in the process people are dropping off in the sales process and where you can focus your efforts. Are most people abandoning when they get to the payment page? The review order page? Analyzing your funnel can help you find out what’s working—and what’s not.
How to calculate: Goals in Google Analytics will show you the completion rate of your visitors. The remaining percentage is your cart abandonment rate. For instance, if your completion rate is 12%, then your cart abandonment rate is 88%.
If you aren’t using Goals, take the total number of completed purchases and divide that number by the number of shopping carts created. Subtract that number from one and then multiply by 100.
Example: If you have 122 completed purchases for one period and 400 shopping carts initiated, then your shopping cart abandonment rate would 69.5%.
1 – (122/400) x 100 = 69.5%
8. Average Order Value (E-commerce Businesses)
Another key metric for e-commerce businesses? The average order value for each purchase. On average, how much are your customers spending on each order? What products are they buying?
While this number can be incredibly useful, keep in mind that if you had a few orders that were extremely high or low in value, then your results will probably be skewed and therefore will be a bit misleading.
How to Calculate: Take the total revenue amount for a given period and divide that by the number of orders you had.
Example: If you made $10,000 in one month and had 250 orders, then your average order value is $40.
While these KPIs are important for most growing businesses to monitor, of course what KPIs you should track will ultimately depend on your business. Take these into consideration but note that your business might require a few of these listed above and a few other ones not mentioned.
Whatever you do, don’t drown yourself in unnecessary data. Choose the few (no more than 10) KPIs that are most relevant to your business needs and home in on those, making sure that you are monitoring them on a regular basis. There are some KPIs that you might be checking every week, while there are others that you might check only once a year.
Finally, don’t get too wrapped up in your KPIs. Keep an eye on them and measure them regularly, but don’t spend all of your time analyzing your data. The most important thing to do is to take the information that you learn and turn it into action.