3 basic metrics you need to understand to grow your business
There are lots of strategies you can use to grow your business, but one that you might not have tried yet is tracking metrics.
The word ‘metrics’ might conjure up images of tech-savvy IT gurus tapping away at computers for hours and looking at spreadsheets, but really, this tactic is for everyone.
Read on for some simple tips you can follow today to take your business to the next level.
1. Customer Acquisition Cost
The customer acquisition cost (CAC) in your business is just a fancy term for how much it costs you to land each new client.
This figure is based on how much you need to spend on marketing and sales exercises to get people to buy from you the first time.
It’s worked out by taking your total customer acquisition costs over a period of time and dividing this amount by the number of new clients you converted over the same timeframe.
You may spend a certain amount of money on advertising, SEO, newsletters or social media in a 12-month period. Divide this by the number of new customers that activity got you, and you’ll have a CAC.
If you spent $5,000 over a year, and got 100 new clients over this time, your average customer acquisition cost is $50.
This metric is valuable because it helps you see if you’re spending your marketing and sales dollars in a wise manner.
For instance, if your product is only valued at $10, yet it’s costing you $50 to get each new client you may have a problem.
The good news is that most acquisition costs reduce as brands become more established in the market.
When you’re already well known and trusted, less money is needed to generate interest and convert sales.
2. Customer Retention Rate (CRR)
To grow your business, you not only need to find new customers but keep the ones you have.
One of the cheapest ways to get more business is to find ways to entice the clients you already have to spend more money with you.
How often do you stop to think about how loyal your customers are to you, though?
If they’re likely to buy from your competitors, you need to improve your customer retention rate.
To work out what kind of retention rate you have, analyse customer purchases to see what percentage of clients buy from you more than once.
Look at your sales data to see how many times, on average, a customer purchases and what the average spend is per transaction.
Alternatively, ask customers for feedback about whether or not they’re likely to buy from you again. Another option is to send out surveys to accumulate data for review.
If you discover that you have a high “churn rate” (that is, most customers only buy from you once and then never return), this shows there’s an issue to address.
For example, your products might not last; shipping methods may be too slow or unreliable; your customer service may turn people off; and so on.
The sooner you find and rectify this problem, the sooner you’ll grow your business.
3. Customer Lifetime Value (CLV)
The third metric to keep an eagle eye on is the lifetime value of customers.
This term relates to the likely net profit gleaned from a customer during the course of your company’s relationship with them.
To calculate this value, start by working out the average dollar amount of your sales.
You’ll get this by dividing your annual sales revenue by the number of customers who purchased from you in that same year.
Once you have this figure, multiply it by the amount of times a customer buys from you over 12 months, and by the average amount of time you retain customers.
For example, let’s say you operate a service where, on average, customers pay you $100 per month, each month of the year, and most customers stay with you for two years.
This means you take $100, multiply it by 12 (the number of months per year), and then multiply this by two.
The lifetime value of your customers would therefore be $2400.
Knowing this metric will help you to make all sorts of business decisions, and to understand your customer base better.
If you know how much revenue a customer, on average, will add to your business – you can start to figure out what a worthwhile acquisition cost would be.
For example, a $1000 CAC may seem high but if their CLV is $2400, then the $1000 CAC may be worth it.
Metrics are nothing to be scared of – it’s simply using the numbers your business generates to make better business decisions.