Big Business Metrics in the World of Small Businesses
Defining Your Key Performance Indicators & How to Use Them
How do you measure the success of your small business? If we could guess, we’d say you probably typically focus on sales and revenue. (Which, by the way, is a great place to start.) But we’d like to propose that you don’t stop there.
A great way to assess the success of your small business is by measuring key performance indicators, or KPIs. In the world of tech/e-commerce/digital startups, this is a super common term, but maybe as a small business owner you know little to nothing about KPIs. Maybe the mention of measuring statistics online has your heart beating fast and has you typing the web address to Wikipedia as fast as you can. Step away from the Wikipedia. And don’t worry. We felt the same way about all this at first.
If you’re a small business owner, we know a few things about you automatically. First, we know that you care A LOT about what you do. Second, we know that you’re an extremely dedicated and hard working person who wants your business to thrive. If that’s you, we’ve put together a super non-intimidating list of key performance indicators you can start thinking about or maybe even tracking!
What Are KPIs?
A KPI is a measurable value that helps a company know if they’re reaching their business goals successfully or not. Organizations often use KPIs to analyze metrics from specific platforms. KPIs can measure financial performance, operational and internal processes, sales and marketing, and customer satisfaction (among many other things).
Key performance indicators give you the answers you need in order to know how to move forward with your business. But before you can get useful answers, you have to ask the right questions. It’s important not to waste time in your already busy schedule getting answers to questions you don’t care about or that won’t help grow your business.
Choosing the KPIs to focus on all boils down to a having good grip on what is important to your business, or in other words, “What is your why?” Once you figure out who or what you’re going after, you’ll be able to decide which KPIs you should start measuring.
To get you started, we’ve put together this handy dandy list of KPIs we think might be important for you to track along with a little more information about each.
1. Customer Acquisition Cost
Customer Acquisition Cost, or CAC, is the cost of getting a prospective customer to buy your product or service (also known as your cost for marketing). Your CAC can be easily calculated by dividing the total you’ve spent on marketing during a certain period and dividing that figure by the number of customers acquired in that same period. So, say a company spent $1,000 on marketing in a year and acquired 50 customers in that year; their CAC is $20.
Like we said, as a small business owner, we know you’re passionate and you love what you do. These are really great attributes that can make you a successful entrepreneur. However, a common pitfall of many entrepreneurs is that they can sometimes be too optimistic and assume everyone else will automatically “get it” and love their product or service as much as they do. Loving your product or service is great. This will help you sell it in an authentic and exciting way. However, one thing you have to be careful of is to not underestimate the cost it will take to convince people who’ve never heard of you to love your product and eventually become new customers.
Sometimes business owners are shocked at the amount of money needed to acquire customers through things like SEO/SEM, PR, Social Media Marketing, direct sales, channel sales, etc. And many businesses fail because they don’t pay attention to their CAC or find a way to get their CAC low enough. Successful businesses, on the other hand, are not only aware of their CAC, but they actively brainstorm and execute ways to lower that cost, or adjust their product or service cost to increase their margins.
2. Customer Lifetime Value
Unfortunately, a lot of business owners overlook Customer Lifetime Value (CLV), even though many agree that it’s a key factor in determining the present and future success of a business.
The lifetime value of a customer is basically the gross margin you can expect to make from that customer throughout the lifetime of your relationship. A big pitfall for many businesses is when their CAC (which we just talked about) exceeds their CLV, while successful businesses will have a CAC that’s not just less, but considerably less than their average CLV.
So, it’s important to come up with a good plan to find out your CLV as soon as possible. Measuring the net profit that you’ll make throughout your relationship with a customer is super important because it helps you realize how valuable they are—or aren’t—to your business. And once you realize which customers are valuable and why, it will ultimately help you properly focus your time, energy, and resources on going after that person and others like them. It’ll help lower your CAC because knowing who you should be targeting helps you spend less money targeting individuals who don’t ultimately turn into customers.
Hopefully you’re starting to see how all of these are connected and could thoroughly help you build a successful business model.
3. Traffic-to-Lead Ratio
Now that we’ve focused on some high-level, generic key performance indicators, we’ll focus on some more specific examples of KPIs that relate to individuals elements of your marketing efforts. Your Traffic-to-Lead ratio addresses the performance of your website specifically and is calculated by dividing the number of visits to your website in a particular timeframe by the number of leads generated over the same timeframe. For example, if you have 100 website visits in a month and 10 of those visitors contacted you, your traffic-to-lead ratio is 10:1 (a 10% conversion rate).
The traffic-to-lead ratio is important because in analyzing your site traffic, you may discover that you have a great conversion rate, but your overall traffic could be higher. If this is the case, you may decide to invest in pay-per-click advertising or organic traffic-generation methods. Or you may discover that you’re reaching a large audience but have a low click-through rate. In which case your action step would be to re-evaluate your target audience or optimize your site’s copy, calls-to-action, and images.
4. Social Media Engagement Conversion Rates
Let’s say you’re one of the lucky ones, and your marketing and social media campaigns are working, your website traffic is high, and people are super supportive of your brand. But maybe your actual sales figures don’t seem representative of your traffic numbers, and things just aren’t adding up. This could be caused by a couple of things. For example, maybe visitors are getting half way through a purchase and then backing out, or maybe they’re viewing a couple of pages of your site but ultimately leaving. It’s important to figure out why, but it’s also super comforting to know that you’re not alone.
(Tangent, if you’re not one of the lucky ones who has great social media engagement, check out our blog on social media engagement for some great tips on how to boost it.)
Although social media now accounts for more traffic to websites than organic search, conversions from social media traffic are lower across the board. According to statistics from Shareaholic, “social media is now the No. 1 driver of referral traffic to websites, responsible for 31.24 percent of the total. In fact, social media traffic has an average conversion rate of 0.71 percent, which is very small compared with search’s 1.95 percent and email’s 3.19 percent.”
One thing that can help your conversions from social media traffic is to give your audience an incentive to purchase. Strong calls to action, such as flash sales or promo codes, are a great way to boost conversions. Another important way to boost conversions is to share your content and offers multiple times. It’s something psychologists refer to as “the mere-exposure effect,” which means the more exposure we have to something, the more we notice it and the more we begin to like it.
So in short, if you want your audience to grab onto your message or your product, it’s important that you regularly expose them to it by posting about it often. In fact, Buzzsumo recently researched over 100 million articles and found that resharing content can boost engagement by 686 percent.
5. Landing Page Conversion Rates
In short, a landing page is a page within your website that’s sole purpose is to drive conversions. It’s focused on one goal, and it’s optimized to achieve it as many times as possible.
The best way to maximize your traffic is to optimize the first page people land on. On average, each small business website has just three landing pages, and by tracking your landing page conversions you can stop spending time and resources optimizing pages that don’t turn into conversions, and pour all of your resources into the one that is.
A homepage can be a landing page, or a landing page can be a completely separate page within your website that users land on after clicking an advertisement or social media link. A good landing page always has a clear “ask,” telling visitors what they get and what they’re submitting information for. Studies show that the sooner you start asking for email addresses the better. So, a great idea for a landing page is a highly visual page that asks for the user’s name and email address, and tells the user what they will receive in return.
A great example of a landing page that converts is the homepage of a company called Ipsy. Before you’re able to browse their products, they ask a few questions about your preferences and for your name and email address so they can follow up with emails and deals. What they want website visitors to do is clear, because it’s the only option when a visitor lands on the page.
6. Advertising ROI
Return on Investment, or ROI, is the money an investor in a business earns for the money they’ve invested. Your return is the net profit of your business and is used to measure the success of your investments.
Return on investment is the most common profitability ratio, and there are many ways to determine the overall ROI of your business. But when looking at advertising ROI specifically, your equation would look something like this:
(Sales Revenue – Advertising Cost) / Advertising Cost
So if you invested $1,000 dollars in an ad campaign and saw a $5,000 increase in revenue, your ROI is 400% or 4 times the amount you spent on advertising.
The trick to successfully calculating your Advertising ROI is in determining what portion of your revenue is attributed to a single marketing effort. When advertising, it’s good to use a unique call-to-action to associate with your campaign. Unique website links, single-use phone numbers, or discount codes are all great elements to use when tracking a specific campaign. That way, you can easily measure how many clicks and/or purchases come from a specific advertising campaign and ultimately see if your return on investment is lucrative.
Many people think return on investment is the same as profit but that’s not the case. ROI specifically looks at the money you invested in advertising and the return you receive on that money based on profits from the campaign.
Show of hands if your brain is on major overload right now. ✋???? We know this is a lot of information, but we hope it’s useful and helps you with some ideas of where to start. Measuring the success of your business can be an intimidating task, but it’s an absolutely necessary aspect to regular growth and development. We hope you’ll take this information and run with it in the right direction towards defining your key performance indicators and growing an extremely successful business!