Which KPIs Do Most Businesses Need to Track and How It Can Help You Grow.

What kind of KPIs do most business need primarily

A Key Performance Indicator or KPI is a business indicator that shows the current level of performance of an individual employee, department, or company in achieving set goals. The goals set must be aligned with the business plans, provide customer loyalty and employees must understand how to achieve them. Only then can KPIs be applied that match the company's marketing strategy.

Net Profit Margin

This metric means the percentage of revenue that the company remains in the form of net profit after deducting all items of expenses, such as operating and finance costs, taxes. To put it simply, the net margin shows how much the company generates net profit per unit of revenue.

Thus, the higher the net profitability, the more efficient the company is. To improve profitability, a company can either increase revenues while maintaining the same cost and tax rate, or optimize and cut costs if sales fail.

The net profit margin can be either positive or negative. If the company has a negative net margin, it is unprofitable, respectively, the company needs to resort to the above methods to increase efficiency.

Net Profit margin is obtained by the ratio of net margin to revenue:

Gross Margin

Gross margin is the company's revenue less the cost of goods sold (COGS). In other words, it is the percentage of sales revenue that a company retains after incurring direct costs associated with producing the goods it sells or the services it provides.

Thus, the higher the average gross profit margin, the more the company retains finance for every dollar of sales, which it can then use to service other expenses or liabilities.

To increase gross margins, a company can raise its selling price or influence cost reductions by lowering costs. One easy way to keep costs down is to reduce labor costs and lower the cost of purchased materials. A more complex process is an increase in production capacity by increasing investment in capital costs, which in turn will lead to an increase in productivity in the future.

Customer Acquisition Cost

If you want to know how much you spend to attract each customer, use the CAC metric.

CAC - Customer Acquisition Cost. In other words, it's the money you put into marketing to find one buyer. If you've started looking for a specific CAC for your business, it's best not. Better to compare CAC with LTV (Lifetime Value). Marketers and analysts say a business is successful if LTV is three times bigger than CAC.

You need to make sure that the cost of attracting a client does not exceed the income from the entire cycle of interaction with him, otherwise, you will simply go broke. For example, suppose you sell aquariums for fish. It costs you $ 200 to attract each new customer. In this case, the analysis shows that you need to draw up a strategy in such a way that the revenue from the client is 3-4 times more, that is, about $ 1000.

Profitable brands pay special attention to correctly calculating the CAC at dashboards and then use this information to correctly adjust and optimize their marketing funnel. And also, to analyze the attitude of CAC to the quality of attracted customers.

A simplified formula for calculating the cost of attracting one customer:

Quick ratio

The metric shows the company's ability to meet its short-term obligations using the most liquid assets. These assets include cash and cash equivalents, short-term receivables and short-term investments grow up to 12 months.

The normal value of the quick ratio is 1, which means that the company is fully equipped with a sufficient number of current assets for immediate liquidation to pay off its current liabilities. In the case when a company has an indicator of less than 1, it may not be able to fully pay off its current obligations in the short term, and this is a bad signal for an investor. While a company with a quick ratio above 1 can instantly get rid of its current liabilities, there is a catch here. If the quick ratio is too high, the company's profitability decreases, as liquidity is inversely proportional to profitability. In this regard, it is necessary to look for a compromise between the profitability and liquidity of the company.

Retention and conversion rates

Retention refers to the ability of a company to retain its customers for a specified period.

Customer retention success is measured by the Retention Rate. Customer retention rate = Number of customers at the end of the period - Number of customers purchased during the period / Number of customers at the beginning of the period x 100%

Let's say at the beginning of January 2020 you had 50 users, in 4 months you have 6 new customers, but at the same time 2 past customers have left and ultimately by the end of April you have 54 customers. Then the calculation will look like this:

This means that 96% of your customers continue to buy your products.

Conversion - the ratio of the number of users at one stage to the number of users at the previous stage. For example, in January, the sales team completed 78 deals and initially recruited 576 leads.

Conclusion

Business metrics are calculated in sequence. They can be represented as a pyramid, where the upper peak is the main indicator. At the second level - the indicators on which the main metric depends, at the third level - those on which the second level metrics depend, and so on. The right calculation of all indicators gives a complete picture of the state of the business in a given period.