Not every business owner wants to dive deep into metrics. However, the only way to truly know how your business is doing is to take its pulse on a regular basis. The good news is that you don’t have to be a data scientist or pore over countless charts and numbers. You just need to track a few metrics that have the biggest impact on your business. For example…
1. Customer Acquisition Costs
We have all heard the saying, “You need to spend money, to make money.” But do you know exactly how much you are spending? Customer Acquisition Cost (CAC) measures how much you are spending in marketing and advertising to gain a new customer.
You can calculate CAC by figuring out how much you spent over a given time period (i.e. 90 days) on advertising, marketing, and other related expenses and then count how many new clients you picked up over that same period. Don’t forget to factor in your time when calculating costs. If your acquisition costs are too high, you should examine how customers are acquired (pay-per-click, email, search engine marketing) and then cut back or ramp up appropriately.
2. Lifetime Customer Value
This number measures how much each customer is worth to your company, in other words, how much a customer will pay you over the course of the relationship. Calculating this may seem next to impossible, but you can start by making a reasonable estimate about how many sales/transactions you can expect from each current client over one year.
Then, take the average value (again, this is only for a year, if you expect clients to stay on much longer, you can extend your projections out). If your average lifetime value is lower than your customer acquisition costs, you need to address this imbalance.
3. Attrition Rate
If you provide a recurring or ongoing service, you should have clients that stay with you beyond the initial sale. Some will stay longer than others. The attrition rate (or churn) measures the number of clients who drop your service in a given period. A 90-day measurement should give you a good idea of how many clients stay vs. drop.
No matter how low your customer acquisition cost might be, keeping a client is less expensive than finding a new one. If you think your attrition rate is too high, it’s time to figure out why clients are abandoning your business and what you can do about it.
You can request feedback with each FreshBooks invoice, and in-person/phone interviews are also a good way to connect with clients and possibly win back their service. For smaller service providers, it’s important to communicate the full breadth of services you provide, as some clients may move on simply because they don’t realize you can help them with all their needs.
4. Cash On Hand
Keeping track of your cash flow is one of the most important ways to safeguard your business’ financial health. You can calculate your cash on hand at the end of each month, after you have paid yourself, your employees/contractors, your taxes, and any other bills.
This metric helps in a few ways. It essentially tells you how long you could keep your business going should sales stop coming in. Determining how much cash comes in and leaves your business on a weekly, monthly, quarterly basis will give you a solid benchmark for budgeting and planning expenses.
5. Gross Profit Per Project
Service companies get into trouble when they don’t estimate their initial hours properly or don’t properly manage “scope creep”. In these cases, you end up spending too much time and resources on a project, hurting your business’ bottom line. You’ll want to keep track of the gross profit percentage per project, and possibly per client to identify any costly over-runs.
6. Referring Traffic Breakdown
Do you know where your website traffic and online leads come from? Use your Web Analytics (i.e. “Acquisition” in Google Analytics) to segment your traffic sources:
- Direct: How many people visited your site directly
- Referrals: How many were directed to your site from another website (and which ones)
- Organic: How many people found your site after a search (and what terms were they searching for)
- Social: How many found you through social media
Understanding these numbers can give you a better sense of which channels are outperforming, and where you could improve your efforts.
What other metrics do you use to determine the health of your business and find areas to improve?