Know your customers and know your business, perhaps those two commandments are the most worn out mantras in the business world. But there’s another, lesser known commandment you need to follow if you want to run a successful business. Why is it not that popular? Maybe because it involves math, people hate math, right?
Know thy numbers.
The numbers, targets, quotas, metrics, or whatever you call it in your industry, is the growth indicator of a business. If a baby’s growth is measured in terms of height and weight, a business’s growth is measured through the growth of its numbers.
If you don’t know which metrics to track, or if you’re not even tracking anything at all, then you can’t really expect your business to flourish. So to make things easier for you, here are 4 key metrics common in most businesses:
- Cost per Acquisition (CPA): The amount it costs to get a new customer. Put simply, it’s the amount of money you spend in the whole marketing process, from ads and commercials all the way to the sales person who convinces the lead to buy. CPA helps you determine how much to allot for marketing and advertising, and if current marketing campaigns are working.Formula: CPA = Amount spent in marketing ÷ total number of sales
Example: Software Company XYZ spent $400 in marketing a new product and got 15 buyers as a result. The software they are selling is worth $75 for each user. So $400÷15 = $26 CPA
In general, if the CPA is less than the product’s selling price ($75) that means the marketing campaign works.
- Average Dollar Sale (ADS): Obviously, this number measures the average amount spent in a single transaction. This number is important because of two things:
- It’s used for determining the lifetime value of a customer or predict repeat business
- It’s used for up-selling and cross-selling
Formula: Total sales per day ÷ Number of customers
Example: Amy’s Nail Salon earned $1800 today and pampered 45 customers. This means the average customer spends $45 per visit. Simple add-ons like French-tip nails for $5, Paraffin dips for $10 or Nail art for $5 per nail can easily increase the average sale.
- Lifetime value of a customer: This gives you an idea how often a customer buys and how much he or she usually spends, which in turn tells you how much to invest in retaining said customer.Formula: Average Dollar Sale (ADS) X Average Number of Repeat Purchases X Average Retention for a Customer
Example: A small company delivering prepared healthy meals charges $200 for a week’s worth of prepped lunches. Customers usually stay in the program for 2 months. Lifetime value of customer = $200 X 4 weeks per month X 2 months = $1600 or $800 revenue each month.
- Conversion rate: Ratio between leads to completed purchase or transaction.Formula: Number of leads÷ number of new customers
Example: A new pizzeria attracts customers by having someone hand out flyers with a coupon at the back. Out of 500 coupons, 150 are claimed. Conversion rate is 500÷150= 3.33.
Understanding and tracking these numbers are crucial to run a successful business. If you haven’t done so, gather the data and start running the numbers immediately. But if you’re already tracking it, the next step is to do an in-depth analysis reviewing quarterly and previous year performances to uncover any patterns that may help you increase said metrics.
