One of the most important actions in any business is measuring your efforts. As entrepreneurs, we wear many hats that require our attention to be on many different things at any point in time. Many small business owners and entrepreneurs fail to capture critical metrics of their business and end up struggling to find consistency in their revenue and cashflow.
You cannot optimize or manage what you cannot measure. How do you know if the actions you are taking are actually producing a return on investment (ROI)? How do you know that the product you are spending the most time creating and delivering isn’t actually costing you money? How do you know where the most ROI is in your business so you can focus more resources on growing that part of your business?
Good questions, huh?
Well today I will share with you 5 areas that every entrepreneur and business owner should be measuring in their business.
Let’s get started.
1. Leads Generated
No matter what kind if business you are in, you must be constantly generating new leads or prospects for your business. Many times, small business owners and entrepreneurs experience fluctuations in their revenue from month-to-month. One month you kill it, and generate several thousand dollars but then the next month the only thing you generate is a GOOSE-EGG!
Can you relate? I know I’ve been there!
In my first business, my income was all over the place. I’d make great money, then no money. After MUCH frustration, disappointment, and stress, I realized that my income was directly tied to the number of leads that I generated the previous month.
Every business will be slightly different in regards to the length of time it takes for leads to nurture, but what I discovered was that one month I was focused on generating leads, which turned into sales that I had to fulfill. At that point, I then turned the majority of my attention away from generating leads for my business and focused completely on servicing my new clients.
In my mind I was working really hard, if not harder, yet I was simply neglecting generating new leads for my business.
This was the #1 thing responsible for the moments of feast & famine in my business.
You must be constantly tracking the number of leads you generate in your business each month and be consistent with that effort.
2. Conversion Rate
In order to know how much effort is required to hit your sales and revenues goals, you must know what your conversion rate. What is a conversion rate you might ask? It’s simply the percentage of people that become new customers out of the leads you generated.
Let’s say you generate 100 leads this month and 15 people purchase your product or service. Your conversion rate would be 15%.
Once you determine your average conversion rate, you can then focus on increasing your sales revenue. Two ways to do this are to find more ways to generate leads or to refine your sales process to increase the percentage of sales you make.
If you need to make 30 sales per month and you have a 15% average conversion rate, you know you need to generate 200 leads to hit your goals.
Not knowing your conversion rate is also very likely to result in inconsistent sales and revenue for your business.
3. Cost of New Customer Acquisition
In order to calculate how much you can spend in advertising, you must first know how much it costs you to acquire a customer. Let’s say that it costs $600 to generate 100 leads. With your 15% conversion rate, you make 15 sales.
If you are selling a $10 product, then these numbers are not good at all! It costs you $600 to make $150 ($10 product x 15 sales). The cost of customer acquisition is $40 ($600 marketing / 15 customers) and you only made $10 in revenue per customer for a net loss of ($30.00) per customer.
(For the sake of simplicity, I didn’t include costs involved in making the $10 product. These numbers would be somewhat accurate for a zero-cost product like an ebook, software plugin, etc.)
However, If you are selling a $1,000 product, then those numbers are GREAT! It cost you $600 to make $15,000! ($1,000 product x 15 sales). The cost of customer acquisition is still only $40 ($600 marketing / 15 customers), but you generated $1,000 in revenue per customer for a net profit of $960.00 per customer.
(Again, these numbers are not factoring costs of creating the $1,000 product. These numbers would be very accurate for a zero-cost product like an online educational course or training, though.)
Knowing your cost of customer acquisition is monumental in making sure that you are generating a ROI on your marketing dollars.
4. Retention Rate
Retention is key to business success. If you are working hard to get people in your front door, but they are walking out the back door faster than you can get them in, your business will fail. In marketing and business, you must know the Lifetime Value of a Customer of your business. Retention is the key to increasing Customer Lifetime Value (CLV).
Let’s say you know that your average customer spends $400 per year with your business, and your new retention efforts result in your customers sticking around for 18 months. Is it worth it for you to spend $100 marketing to each customer? YES, absolutely! You know that every customer you get is worth $600 to you over the next 18 months!
If you know these numbers and you have a marketing system that is consistent, you would want to spend as many $100 bills as possible because you know that for every $100 in customer acquisition costs, you generate $600 in sales over 18 months.
It should be easier and more profitable for you to keep old customer than it is for you to generate new customers. The best and most cost-effective way to generate new customers is through your existing ones! Think, word-of-mouth or referral marketing. How can you incentivise your customers to tell their friends about your product or service?
5. Cash-flow & Profit
Continuing the conversation from #4, you must know what your cash flow and profits are in order to know how much money you can afford to spend on marketing.
One of the reasons why I am not a fan of deal sites like Groupon or LivingSocial from a business side, is because they have the potential to do more harm than good. These sites have forced many small business to close their doors because of poor planning on the business owner’s end and lack of cash-flow.
Let me explain. A restaurant owner is looking for ways to get new customers, the owner doesn’t have a marketing budget so low-cost solutions are the only options. The Owner decides to run a Groupon to get new customers. New customers see the coupon and come to redeem the coupon. Groupon typically requires a 50% off coupon (ie: $20 of food for $10) Then Groupon splits the $10 with the business owner. So, the business owner really only gets 25% of a full price sale.
The catch is that Groupon doesn’t pay that 25% for 40-90 days, leaving the business owner in a pinch because he delivered the food to the customer with the coupon, but hasn’t been paid for it yet. If Groupon generates TOO much business for the restaurant, the owner could not only run out of food, but also not have the funds to order enough food to cover customers by the time they receive payment from Groupon.
Click for more info on why Groupon and LivingSocial can be bad for your businesses.
Woah. Ok, Groupon Rant OVER! Let’s get back on track.
The point is, that you must know what your cash flow is and how much profit you will make based on the number of sales you make.
Not knowing your cash-flow and profit numbers will surely put you in a painful situation.
Taking it one step further
Metrics are important, but what’s even more important is making sure that the actions you are measuring are actually in alignment with what you are seeking to accomplish. You can measure the results of your actions all day long, but are you taking the right actions? Are there more efficient actions you could take to get you to your goals faster?
A strategic marketing plan is the backbone of any successful business. Metrics are just one small component to a strategic marketing plan. I’ve put together a product, called The Strategic Marketing Compass, that’s designed to walk you, step-by-step, through creating a strategic marketing plan for your business.
If you liked this blog post, this is just the very tip of the iceberg! You will LOVE the Strategic Marketing Compass!
For more information on creating a rock-solid Strategic Marketing Plan, check out my blog post: Introduction to the Strategic Marketing Compass
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