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Business IQ

Simple metrics your small business can't afford to ignore

Jeff Haden
Business Journalist

Jeff Haden is a bestselling ghostwriter, speaker, Inc. Magazine contributing editor, and LinkedIn Influencer

Jeff Haden
Business Journalist

Jeff Haden is a bestselling ghostwriter, speaker, Inc. Magazine contributing editor, and LinkedIn Influencer

Measuring how well your business is performing can be done a multitude of ways. Jeff Haden looks at the four that will show early signs of trouble, or indications of success.

If you’re into data, you can find countless ways to evaluate your business. If fact, you can create so many formulas, spreadsheets and dashboards that looking at data is all you do.

Alternately, you could go to the other extreme and concentrate solely on profit and loss.

The best approach is to split the difference: focus on the bottom line, then add in a few other financial and performance measurements that can provide early warning signs of trouble – or early indications of longer-term success.

Here are four metrics your small business simply can’t afford to ignore:

Man and woman sitting in an office

1. Cost to acquire customers (CAC)

Also known as customer acquisition cost, this measures the cost of landing a customer. In simple terms, add up the cost of marketing and sales, including salaries and overhead, and then divide that by the number of customers you land during a specific time frame. You’re looking to calculate the average cost that goes into acquiring customers, so the more accurate you can be, the more valuable this information will be when it comes to analysing your profit margin and marketing spend.

As an example: If you spend $100 and acquire 10 customers (in the same time frame), your CAC is $10.

Digital platforms, like Google Ads (formerly AdWords), offer a CPA measurement just for that platform. In this case, the price you pay per conversion is calculated by aggregating the costs of conversions across all your Google Ads.

In this case, a conversion occurs when someone clicks on your Google Ad and then makes another action such as a purchase or a newsletter signup. You could use this number to calculate whether or not the spend is worth the reward. What’s a good number where CAC is concerned? That depends on your industry and business model.

The key is to understand how your CAC fits into your overall operating budget. The leaner your operation, the more you can afford to spend to acquire a customer. As many digital platforms and business tools allow detailed data, it’s worthwhile testing methods to find what works for your business, so you can optimise those channels to deliver the best results.

2. Lifetime value of a customer (LTV)

Some percentage of your customers will – or at least definitely should – become repeat customers.

The more repeat customers you have, and the more those customers spend, the higher CAC you can afford. Some business models, especially those with high customer acquisition costs, are built on breaking even or even taking a loss on the customer’s first purchase. Future purchases are then profitable since the CAC is at or near zero.

LTV is often tricky to calculate and does involve making a few assumptions, especially if you’re a startup. But once you’ve built a little history you can start to spot customer retention and spending trends.

Then the math gets a lot easier. Determine what the average customer spends over a specific time period and then calculate the return on your original CAC investment. Then, sense-check the result against your profit and loss statement.

Roughly speaking, the greater the LTV, the higher CAC you can afford.

Why do these two metrics matter so much? A rising CAC means you’ll need to start cutting costs, raising prices, or making efficiency improvements within your marketing and sales efforts. A falling LTV indicates the same measures are necessary… and means you’re failing to leverage the most important and least expensive customers you have: current customers.

3. Churn rate

Churn rate is the percentage of customers or subscribers who stop buying your products or using your service during a specific time period. The higher the rate, the more customers you’ve lost.

Lost customers are like failed investments: you spent money to acquire, service, and retain them… and now they’re gone.

A rising churn rate could be caused by a number of factors including issatisfaction with your products and services, increased competition, or even the end of a product or service cycle.

Churn rate is an early indicator of rising CAC and lower LTV.

To maintain revenue, your CAC will go up since you need more new customers, and your LTV will go down for the same reason.

In fact, all three are great leading indicators of problems or successes to come, both in other metrics and for your business overall.

4. 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 there are things you need to look at.

Take a traditional business like wedding photography. To keep things simple, say 80 percent of revenue historically comes from the initial wedding package sold to couples, 10 per cent from additional sales after the wedding to the couple, and 10 percent from post-wedding sales to friends, family, etc.

If post-wedding sales fall off, that can significantly impact overall profit levels since almost all marketing and sales costs go into booking the weddings – which means the margins on additional sales are naturally much higher.

Keep a close eye on the revenue contribution percentages of your different products and services – changes often signal not just shifts in customer spending habits but also broader trends in your industry and market.

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Originally published June 5th 2015. Updated July 31st 2019.

Chris Kasapis from CKAS Mechatronics
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