Do you know the important metrics that can really change your entrepreneurial life? Something that can tell you many things about performances of your small business?
If you measure, you will know the performance of your company and you can make the right decisions that will bring you success.
As an entrepreneur, you will need to know and follow many important metrics and numbers in your small business. But, here I want to talk and explain the five most important metrics that you really need to know whether you want to be in a position to make the right decision for your company.
Let’s look at them.
1. Average Sale in Currency Per Customer
How much is the average sale in currency per one customer?
Probably your numbers if you hypothetically have ten customers will look something like this:
|Customer||Year||Total Sale per Customer|
You see that your sale is between $5.000,00 to $13.000,00. But, this conclusion is not something that will give you insights about how much you are alowed need to spend to bring another ten customers for your company. Because of that, you will need to calculate the average sale in currency per customer,
Average Sale = Total Sale / Number of Customers
In the example above it will be:
Average Sale = $90.000,00 / 10 customers = $9.000,00 per customer
This means that your company has an average income of $9.000,00 from each customer. Now if you want to double your income for the next year, you will know that you will need at least ten more customers for your small business.
2. Conversion Rates
How many customers you have as a percent of all potential customers who entered in your sales funnel?
The conversion rate is the ratio that will tell you how much leads was transitioned from the position of the leads in your sales funnel into the real buyers at the end of the sales funnel. These are the persons who give you the money for your products and services. This metric is expressed by percents of entires into your sales funnel. For example, 10% conversion rate means 10% of people who were at the beginning of your sales funnel become buyers who buy something from your company.
Let’s say that your marketing efforts bring 100 people into your sales funnel, and at the end of the process you have only five customers who come to you and buy something that your company sells to them. So, your conversion rate will be 5% because only 5% of 100 potential customers become real customers.
Now, when you know that your conversion rate is 5%, and because you want to double your income for the next year, that means you will need ten more customers who will spend on average $9.000,00, and to succeed in this you marketing efforts will need to bring 200 potential customers to become a part of your sales funnel.
3. Customers Acquisition Costs (CAC)
How much money costs you the acquisition of a customer?
This metric, as the name tells us, indicates the costs that your business will need to make in order to acquire, or activate for the web/mobile platforms an additional customer.
For example, if you spend $5.000,00 to bring 200 potential customers into your sales funnel, and only ten of them become real customers who spend money and will continue to be customers of your company, your customer acquisition costs will be $500,00 per customer.
This means that you will need to invest $500,00 to bring one customer that will spend $9.000,00 on annual level.
Now, you simply know that if you want to succeed in doubling your income for the next year you will need to spend $5.000,00 to bring 200 potential customers into your sales funnel, and ten of them will become customers who will spend on average $9.000,00 on your products and services next year.
4. Customer Life Time Value (CLTV)
How much is worth an acquired customer for my company?
Until now, we have talked only on a specific period of time that in the examples above is one year. Now, with this metrics, we will define the life time value of a customer for your company. With this metric, you, simply want to know what is the value of your customers on a long-term relationship with him.
To calculate CLTV you will need to know the following numbers:
- Average sale in currency per customer. This is the first metric that I have explained here. In our example on an annual level, it is $9.000,00.
- Average gross margin. If your gross margin is 50%, then your average profit per customer for one year is $4.500,00.
- Customer acquisition cost (CAC). If your customer acquisition cost is $500,00, now your customer will be worth $4.000,00 at first year and $4.500,00 for the next years.
- The number of years your customer will be an active customer. If on average your customer will make the same purchase five years after they become your customer and then it will disappear, it means that customer lifetime value for your company is $4.000,00 + 4 x $4.500,00 = $22.000,00
But, this example is not so real. Often, customers can decrease their spending in your small business. You cannot expect that it will be the same year over year. Because of that, you can use something like retention rate. For example, if retention rate is 80% on year over year basis in the second year instead of $9.000,00 income from a customer you will have $7.200,00, in the third year you will have $5760,00, in the fourth year it will be $4.608,00 and in the last fifth year the income will be only $3.686,00. Now, we will have:
|Year||Retention Rate||Average Sale||Average Gross Margin 50%||CAC||Annual Worth|
As you can see in such a way, your customer life time value (CLTV) will be $4.000,00 + $3.600,00 + $2.880,00 + $2.304,00 + $1.843,00 = $14.627,00.
Another one metric that will be really helpful for you is the ratio of CLTV and CAC that will tell you how much money you will bring back for one invested dollar in acquiring the customer. In this example, we will have:
$14.627,00 / $500,00 = $29,20
This means that you will receive $29,20 for each $1 invested in customer acquisition. This ratio is important also when you validate your business idea because if you have a lower ratio it is the signal that your small business will not be so profitable as you think.
As you can see many, decisions for your next entrepreneurial steps can be made because of these important metrics. You need to build your own system how you can follow them and measure the performance of your company.
Question: What type of metrics are the most important metrics on which you base your decisions on an everyday level in your small business?