Metrics Made Easy: How To Make Sound Business Decisions

“Insanity is doing the same thing over and over and expecting different results.” – Albert Einstein

One of the joys of owning your business is the freedom to make your own decisions.

One of the curses of owning your business is that there’s nobody to tell you the right thing to do.

How do you make decisions in your business?

If you’re like most business owners, you play a bit of a guessing game.

Sure it’s an educated guess; and your experience in your business and industry help... But if the decision is a critical one and you want to improve your odds, you want to base your decision on hard facts.

You want to use feedback.

Feedback

Feedback means using data collected from your business to guide your actions. You measure how well things work, then you use this information to take action.

It’s evidence based. Hard numbers and facts.

It leaves no wriggle room for doubt, wishing and hoping – which very often cloud our judgement when making decisions.

Using feedback has only one requirement: The ability to measure how things are working.

That’s where metrics come in. Metrics are the information we extract when we measure our business and find out how things are working.

An example of a metric is revenue. If you track your business revenue, and you probably are, then you’re already tracking that metric.

Your business is complex. There are hundreds of numbers to consider. Even tracking a few of them can feel like drowning in a sea of numbers...

So today I thought I’d simplify this a little. I’ll present the strategic perspective for metrics with a focus on making decisions related to growing your business.

Using metrics to inform your business decisions is a three step process:

1. You decide what data you want and how to track it
2. You measure how things are working
3. You make informed decisions

I’ll be covering these points at a level that everyone can understand. A level that will allow you to find the numbers that are key for YOU in your business... and then use them effectively to move your business forward.

So without further ado, let’s start

Navigating the sea of metrics

If you’re interested in growing your business, there are two main areas of interest:

• Acquiring more customers, and
• Getting more from each customer you acquire.

These are your business’ bottom line activities. They are also important areas to track with metrics, because by improving them you can raise the position of your business.

Let’s look at them in more detail.

Customer acquisition metrics

The single most important metric associated with acquiring new customers typically called the customer acquisition cost (CAC). This is the amount of money you have to invest in order to get one new customer to spend money with you.

And just to be clear, we’re not talking about leads or “free trial” customers here. These are actual paying customers. They may have paid a reduced price, but they gave you some money in exchange for what they got.

Here’s an example: You run an advert on your favourite site and spend ￡1000. If you get 50 paying customers from that ad, then each customer cost you ￡20 (That’s ￡1000/50).

It’s really that simple. And it’s also profound. I’ll illustrate this through the two beginner mistakes I see most often.

Rookie Mistake #1: Working on a fixed, high-level CAC

You pay your customer acquisition cost for each customer you acquire. But there’s a catch...

A lot of rookies focus on calculating the CAC so they know how much they spend in customer acquisition.

It’s a good start, but also a missed opportunity.

The true power of the CAC is acknowledging that it is variable, and working to lower it.

If you ran a second ad, spent another ￡1,000 and got 40 paying customers, then your CAC for this campaign is ￡25. This is obviously inferior to the first ad, so you know you’re better off killing this campaign.

And if you found a new way to get customers that only cost ￡15 per customer, then you want to explore this method as much as possible, and use it in preference to your ￡20 per customer ad, because – all else being equal – it’s cheaper.

Rookie Mistake #2: Too much focus on customer acquisition cost

Your CAC is important – you want to minimise it. But this is only the case if everything is equal, because it’s only part of the picture.

In other words, acquiring customers is not just about cost. There are other factors to consider.

One such factor is personal preference. You may enjoy working with some people more than others, and this means that you’re ready to pay more to acquire them. (I won’t delve into that however; this article is about metrics.)

A lot of rookie business owners focus too intently on the first sale. They want to see how much profit they can make as quickly as possible.

Savvy business owners don’t worry about their initial profit margins that much. They might even lose money on the first sale (a loss-leader strategy).

And while I’m not advising you on specific strategies, I am advising that you focus on a much more important number: The lifetime value of your customers. This is the second important metric.

The Value Of Each Customer

The amount of money you realize from every customer you bring in is what will pay your bills. The value of each customer to your business is called Life Time Value (LTV).

Once you have a paying customer on your books, the hard work is done. Because someone who has paid you once (and is happy with what they bought) is more likely to buy from you again and again.

Lifetime value is about the offers you make to your customers after they make the first purchase. This can be down the line, or even before closing the first sale.

For example – if you try to buy something electronic, you may be offered insurance. The seller is trying to increase your value to them even as the sale is closed.

They may try to contact you down the line, again trying to increase your value as a customer. If you’re happy with them, you may very well choose to take them up on their offers.

The math for this number is also simple. It’s the average of what your customers have spent in total. Let’s say you have two customers for simplicity.

Frank buys your initial offer, spends ￡10 and that’s it.

Amy buys your initial offer for ￡10, consulting for ￡200 and a year later upgrades her product for ￡250. In total her lifetime value is ￡460.

In this case, your LTV is ￡235 (a total spend of ￡10 + ￡460 = ￡470 – divided by the number of customers: ￡470/2 = ￡235)

The best way to boost lifetime value is by treating your loyal customers right. Making them special, exclusive offers. Giving them discounts. Making them feel like they’re being treated differently.

There is logic in keeping your loyal customers happy. Because that’s what keeps you happy.

Using these metrics

You want more customers, which is where this number comes in. Being clear on your lifetime customer value will allow you to plan your customer acquisition costs.

It’s important to look at these numbers together. If you know that your cost to acquire a new customer is ￡20 and the average value of a customer in their lifetime is ￡235, you’re in a good place.

You should also know how much it costs to deliver your service – that’s typically a pretty static figure – and work out how profitable each customer is.

Remember that while these numbers are critical, they also change over time. And tracking the headline figures – the most simplistic application – won’t allow you to optimise your results and maximise your profits.

If you want to get the most out of your marketing efforts, you’ll want to drill down into the details.

This means multiple sources of customers (coming from different campaigns or different channels) require separate analysis.

That’s where the confusion often sets in.

And that’s why it’s important to have a crystal-clear understanding of what you want. So you can identify the exact metrics you need to watch and laser focus on improving your results.