Performance Metrics: Good, Bad, or Indifferent?

Transcription

1 Performance Metrics: Good, Bad, or Indifferent? AN ENTREPRENEUR S GUIDE TO KEY PERFORMANCE METRICS By Mark Collins, Trep Advisors Revised December MCX Enterprises LLC TrepMetrics 1

2 Introduction Numbers are not sexy to most entrepreneurs. They are boring, and they can be confusing. But the biggest problem with numbers is that there is just too much available data. A recent Wall Street Journal article, The Corporate Downside of Big Data, said the biggest challenge with having all these numbers is determining how to get value from the data. The WSJ article focused on large corporations, but there were some comments that are relevant to entrepreneurs: Just because something can be measured doesn t mean it should be measured. What do we do with all these numbers? 2013 MCX Enterprises LLC TrepMetrics 2

3 What should be measured? Web analytics provides hundreds of possible numbers to track, but what is really important? Twitter mentions, Facebook Likes, Google PageRank? And what about financial metrics? One major bank advises small business owners to use financial ratios to make the data monitoring task a bit less daunting, and then proceeds to identify eight categories of ratios -- income, profitability, liquidity, working capital, bankruptcy, long-term analysis, coverage, and leverage and several ratios within each of those categories. And this is supposed to make the task less daunting? What should you do with all these numbers? If your Facebook Likes have increased in the past two months, should you continue to devote more resources to Facebook marketing? Or, if website traffic has decreased, should you hire an internet marketing guru to boost traffic? So, where do you stand regarding performance metrics good, bad, or indifferent? 2013 MCX Enterprises LLC TrepMetrics 3

4 The Good There are some compelling proponents of the good Pearson s Law: If you measure it, it will improve. Seth Godin s Purple Cow, Companies that measure will quickly optimize their offerings. Also from Purple Cow, the winners will be companies that figure out what s working fastest and do it more (and figure out what s not working and kill it). The Bad And, there are also some arguments for the bad : The big data trap discussed in the WSJ article. Too much data available that is not relevant. Soft metrics that sound good, but really don t matter, i.e. Facebook Likes and Twitter Followers. It takes too much time to measure and monitor all the analytical data. The Indifferent Most entrepreneurs seem to fall into the indifferent category for a number of reasons: Metrics are of no importance or value. A general lack of interest. Metrics, KPIs and balanced scorecards are for big corporations. Many just don t like numbers they are boring, confusing, and best left to the accountants MCX Enterprises LLC TrepMetrics 4

5 The Metrics What Should Be Monitored? The biggest issue facing entrepreneurs is determining which metrics are important enough to monitor on a daily basis. This is obviously going to be different for every company, so here are some thoughts from a few experts concerning important metrics. Shanelle Mullin, Onboardly Metrics help entrepreneurs make smart, informed decisions. They can identify trends and patterns, problem areas and successes, and potential next steps. The most important metrics depend on the stage of your product. In the beginning, focus on engagement metrics and feedback from users. In the later stages, focus on growth metrics. Growth metrics are relative depending on what you are trying to accomplish, so figure out what your most important metric for growth is and focus on that. Always look at your numbers in context. Measure the tangibles and act on the analytics, but have the intangibles in the back of your mind at all times. Don t get caught up with vanity metrics. They re the easiest to spot and the easiest to measure, so many entrepreneurs fall into the trap. The number of Twitter followers you have is all but completely irrelevant. Focus on the metrics and the data that s impacting your company. If you re not using it, get rid of it. Collecting data you re never going to use just bogs you down. Collecting is smart. Collecting without eventually acting is a waste of resources MCX Enterprises LLC TrepMetrics 5

6 Kim Lachance Shandrow, Tech Journalist, Entrepreneur Magazine Tracking social media efforts allows companies to quickly measure what is and isn t working. Busy entrepreneurs time is precious and it is mission critical to know what to do more of what to stop doing in near real-time. Tracking the number of website conversions that come from your social media accounts is the single most efficient way to gauge your social media marketing ROI. Two other top metrics to track are cost per lead and cost per acquisition. Obsessing over how many followers and likes you get, and how high your Klout score is, are all time- and effort-wasting mistakes. Neil Patel, VP of Marketing, KISSMetrics Revenue is the most important metric when it comes to starting a business. But it s not the only metric you should be concerned with. Here are the other most important metrics to track: Customer Acquisition Cost calculated by dividing your sales and marketing costs, including overhead expenses, for a given period by the number of customers you picked up during that period. Retention many entrepreneurs get so obsessed with customer acquisition that they forget about customer retention. It can often cost 4-5 times more to acquire a new customer than it does to keep a current client. Churn a measure of how many customers stop paying for your product MCX Enterprises LLC TrepMetrics 6

7 Life Time Value this is how much you expect to earn from a customer during the time they are with your company Referrals track this as a percentage of users who come from existing customers. As you would expect, the higher your referral rate, the lower you CAC is going to be and the more profitable your company will be. Mary Ellen Biery, Sageworks Is your business successful? If so, how do you know? While different people have various definitions of business success, there are five key financial metrics that can help you understand your business financial success: 1. Pre-tax net profit margin this is probably the most important metric, because it tells the owner how much profit you re making from every dollar in sales. For private companies, it is usually expressed as net profit before taxes in a given financial period divided by sales. 2. Current ratio and quick ratio these two metrics are considered fundamental liquidity ratios that give an idea of how well you can meet your obligations. Current ratio is expressed as current assets divided by current liabilities. 3. Accounts payable days and accounts receivable days these metrics help the owner determine if they are paying their suppliers too quickly, or if they are not receiving payments quickly enough from their customers. Accounts payable days is expressed as accounts payable divided by cost of goods sold, multiplied by 365 days. Accounts receivable days is expressed as accounts receivable divided by sales multiplied by 365 days MCX Enterprises LLC TrepMetrics 7

8 Paul Dunay, Maximyser If you have $100 to spend on internet marketing, would you be better off devoting that money to doubling your web traffic, or doubling your conversion rate? Many marketers get this wrong. More and more online marketing budgets are disproportionately aimed at driving traffic, rather than conversions. But doubling your conversions can be dramatically more profitable than doubling your website visitors. If you aren t tracking conversion rates, boosting traffic rates just won t matter. No matter how you define a conversion, the holy grail for online marketing is to increase sales. Jeff Haden, Inc. Magazine Profit and revenue tell you a lot but they don t tell you everything about the health of your business. But there are a few other financial and performance measurements that can provide earlier warning signs of trouble or early indications of longer-term success. Here are four metrics your business can t afford to ignore: Cost to Acquire Customers (CAC) This measures the cost of landing a customer. Add up the cost of marketing and sales, including salaries and overhead, and divide by the number of customers you land during a specific time frame. Lifetime Value of a Customer (LTV) Unless your business is truly one-off, some percentage of customers will become repeat customers. The more repeat customers you have, and the more those customers spend, the higher CAC you can 2013 MCX Enterprises LLC TrepMetrics 8

9 afford. LTV is often tricky to calculate and does involve making a few assumptions, at least during the startup phase. Determine what the average customer spends over a specific time period and calculate the return on your original CAC investment. Churn Rate Every business gains and loses customers; that s a fact of business life. But the churn rate trend is important to track and analyze. Revenue Percentages Very few businesses only have one source of revenue. Most have multiple sources, and changes in the contribution percentage each makes can indicate problems are ahead. Changes in revenue percentages can often signal not only changes in customer spending habits but also broader trends in your industry and market. Next A plan for getting started MCX Enterprises LLC TrepMetrics 9

10 The Plan for Getting Started There will never be one list of key performance metrics that applies to all entrepreneurial businesses, and there will never be agreement on the most important marketing and financial metrics to monitor. Here is a simple plan for getting started tracking your key performance metrics on a daily basis: Develop four key metrics two marketing metrics and two financial metrics. You may certainly have more than four key metrics, but this will force you to really think about what is important to the profitability of your business. Monitor the metrics for at least a month to establish a baseline. It could take even longer, but when you are comfortable with the baseline, you can begin to set goals for improvement. As you gather data and calculate metrics, you may find weaknesses or inefficiencies in some of your current systems that can be improved to make the process easier going forward. About TrepMetrics TrepMetrics is a system developed to help entrepreneurs track their key performance metrics. It is designed to save time by making relevant data available in one place, and to increase profits by making informed decisions in a timely manner MCX Enterprises LLC TrepMetrics 10