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4 Key Metrics on Which Your Business Depends

Effective business management is impossible these days without analyzing and using key metrics. Metrics allow you to predict trends, make informed decisions, and succeed in a dynamic environment.

In this article, we will look at four key metrics that your business depends on and how to use them to achieve outstanding results.

Process metrics are numerical or qualitative indicators that allow us to assess how well a certain business process is functioning. They may vary depending on the goals and characteristics of your business, but the main thing they do is give you an objective picture of what is happening in your business. Remember: you can't control what you don't measure.

Let's start with the first metric.

CAC (Cost of Customer Acquisition) – the cost of attracting a customer. Every business knows that attracting customers requires financial costs. However, mistakes often arise related to understanding this cost.

The first mistake is that many entrepreneurs confuse the cost of attracting a customer with other metrics, such as the cost of a lead or the cost of a click. This can lead to incorrect calculations and evaluation of the effectiveness of marketing efforts.

The second error occurs at the calculation stage of the series, all the money for advertising was counted and divided by the number of customers.

In fact, the cost is much higher. Because it is necessary to include all costs, and this includes the marketing budget, employee salaries, software costs, and possible extras. expenses.

In total, it turns out that if you spend 200,000 per month on advertising and have attracted four customers, then the cost is not 50,000. Because you spent another 200,000 on salaries, another 50,000 on software, and an additional one. the cost is 50,000, in our case it is, for example, an estimate of TK from a client. A total of 500,000 was spent on four clients, it turns out that each one costs us 125,000. Mathematics is completely different at once.

LTV (Lifetime Value) is an indicator that shows how much money a company can earn from one client during the entire time of his cooperation with it. Often people think that LTV is simply equal to the average check multiplied by the frequency of purchases. But this is not always the case.

Let's say you have a client who spends 20,000 monthly and has been working with you for two years. In this case, the LTV formula will look like this:

LTV = (20,000 × 12 months) × 2 years = 480,000.

It looks like a simple calculation, right?

But there are pitfalls that are often overlooked. We do not take into account additional factors such as seasonality, changes in the average check and customer churn.

For example, if 5% of your customers leave every month, your real LTV is already less. In addition, you should consider the cost of customer retention, which may include discounts, gifts, and support costs.

This includes not only the monetary component, but also the time of your team.

This is similar to the situation with calculating the cost of attracting a client, isn't it?

Simply dividing the total cost by the number of customers can lead to an overestimated or underestimated indicator.

In this case, if the cost of retaining the client amounted to 50,000 over two years, then the real LTV will be equal to 480 000 - 50 000 = 430,000.

Our next stop will be ARPU, or average revenue per user. This indicator is important for both digital and classic businesses. It helps you estimate how much money each of your clients brings in on average over a certain period of time.

It is quite simple to calculate it: the total income for a month (or another selected period) is divided by the number of active customers.

Let's say your total monthly income was 2 million, and you have 10 active customers.

ARPU = 2 000 000 / 10 = 200 000.

It is important to remember that ARPU provides us with information about the current situation and may not always fully reflect the real picture.

Additional customer segmentation is often required, as different services or business segments may have different average receipts and revenue per user.

For example, we have project development, hourly development, support, development of technical specifications. Each service has a different average receipt and a different income per user. Therefore, we consider both one thing in common and for each segment.

The average income per customer is useful, especially if you need to quickly assess how well your business is operating in terms of profit.

Churn rate (CR) is a metric that often goes unnoticed, but it is of great importance because it reflects the proportion of customers who left you for a certain period, for example, for a month. This indicator is used to assess the sustainability of your business and the duration of customer interaction with you.

How to calculate it?

Let's say you had 100 clients at the beginning of the month, and by the end there were 95 left. This means that the outflow amounted to 5 customers. The simple formula looks like this:

(5 / 100) x 100 = 5%.

However, as with other metrics, this indicator has its own characteristics. It can be calculated in different ways in different industries. In addition, it does not always provide a complete picture, if you do not take into account the reasons for the outflow.

For example, your company may have different types of projects: short and long-term, and churn may be higher in short projects due to their temporary nature. Therefore, we analyze the churn rate both for the entire company and for each type of project separately.

In fact, these 4 indicators cover the entire activity of the company at the upper level. That is, the customer's value shows the work of marketing and sales, the life cycle shows the processes of customer development, the average profit per user shows the level of production, and the churn rate shows the level of service quality. Then apply it with other metrics, for example, customer satisfaction, advertising costs, transaction deadlines, depending on business goals.

It is important to avoid an excessive number of metrics and focus on their contribution to achieving business goals.

At Sailet, we used three key metrics: revenue, marginality, and customer satisfaction. They play an important role in evaluating the effectiveness of our business and help us make decisions.

Revenue allows us to measure the success of our marketing and sales. The increase in revenue indicates that we are attracting more customers and increasing sales.

Marginality, on the other hand, shows how effectively we manage costs and evaluate production processes. If revenue is growing but margins are declining, this may indicate inefficient production planning or evaluation. In this case, we can take measures to optimize processes or introduce new evaluation models.

The level of customer satisfaction helps us understand how successfully we are doing our job and meeting customer expectations. If this indicator decreases, it may indicate problems with the quality of the product or service, as well as non-compliance with customer expectations. This may be a signal to us that changes need to be made to processes or customer interactions.

It is important to note that these metrics are interrelated. For example, if our goal is to increase the number of new customers, but attracting each customer increases the value of the transaction, this may negatively affect margins. Therefore, we also track metrics related to customer acquisition costs and return on marketing investments.

All these metrics together help us get an objective picture of the state of our business and make the necessary adjustments to achieve our goals.

There are unique metrics in various business sectors that help to evaluate the effectiveness of processes. Let's look at some examples of such metrics:

  • Pharmacy chain: "waiting time at the checkout" metric

An increase in waiting time at the checkout may indicate problems with staff productivity or cash register equipment. This can negatively affect customer satisfaction and repeat purchases. Analyzing this metric will help identify and fix problems in a timely manner.

  • Beauty salon: the "fullness of jobs" metric

This metric allows you to evaluate the efficiency of the use of workplaces in the salon. Low occupancy may indicate a suboptimal schedule for the masters or problems with marketing. Increasing this metric will help increase revenue and improve the overall operation of the salon.

  • Car service: metric "average car repair time"

If the average repair time increases, this may indicate equipment problems, a lack of qualified specialists, or inefficient work processes. Tracking this metric will help identify bottlenecks in the work and improve the quality of services.

  • Fitness club: the metric "attendance of group classes"

Low attendance at group classes may indicate that clients are not interested in classes or an inconvenient schedule. Analyzing this metric will help you identify popular classes and optimize your schedule, increasing customer satisfaction and revenue from group classes.

  • Travel agency: metric "conversion rate of offers to sales"

This metric reflects the success of turning agency offers into real sales. A low coefficient may indicate poor-quality offers or insufficient customer service. Working on improving this metric will lead to increased sales and customer satisfaction.

These examples demonstrate how different metrics can be applied in different businesses and how they relate to different aspects of a company's business.

It is important to note that setting metrics is only the first step. The main thing is to use the collected data to continuously improve your processes. If you notice that some metric is deteriorating, you need to find the reason and make adjustments to the process. The analysis of metrics will help to identify bottlenecks and optimize the company's work, which will lead to increased efficiency and achievement of goals.

Setting and tracking process metrics is the key to successful business management. This allows you to have a clear understanding of what is happening in your business and makes it possible to make informed decisions. Feel free to experiment with different metrics and tracking methods to find the most effective ones for your business.

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А как тогда правильно посчитать LTV?