Key Performance Indicators (KPIs) are essential metrics that help small businesses gauge their performance and make informed decisions. While there are numerous KPIs to choose from, focusing on a few critical ones can provide clarity and direction for your business. In this post, we’ll discuss three simple, yet powerful KPIs every small business should know and track.
1. Revenue Growth Rate
Why It Matters – Revenue growth rate is a fundamental indicator of your business’s health and potential. Tracking revenue growth rate helps you understand how well your business is expanding and whether your sales and marketing efforts are effective.
How to Calculate – to calculate your revenue growth rate, use the following formula:
| Revenue Growth Rate = | Current Period Revenue – Previous Period Revenue |
| Previous Period Revenue |
Example: If your revenue last year was $100,000, and this year it’s $120,000, the revenue growth rate would be:
| Revenue Growth Rate = | $120,000 – $100,000 | = 20% |
| $100,000 |
What It Means – a positive growth rate indicates that your business is generating more revenue in the current period compared to a prior period. It often indicates that your sales and marketing efforts are effective in attracting new customers, retaining existing ones, and driving more sales. It can also indicate positive growth may also be a reflection of strong demand for your products or services in the market.
Conversely, a negative growth rate can be a red flag indicating that your business may be facing challenges or issues. These issues could range from declining demand for your products or services to increased competition, economic downturns, or operational problems.
2. Customer Acquisition Cost (CAC)
Why It Matters – CAC helps you to understand how much it costs to acquire a new customer. The KPI is crucial for ensuring that your marketing and sales efforts are cost-effective.
How to Calculate – to calculate CAC, use the following formula:
| CAC = | Total Sales & Marketing Expenses |
| Number of New Customers Acquired |
Example: If you spent $5,000 on sales and marketing in a month and acquired 50 new customers during that same month, your CAC would be:
| CAC = | $5,000 | = $100 |
| $50 |
What It Means – A lower CAC is generally better, as it indicates efficiency in acquiring new customers. Conversely, a higher CAC could mean inefficient, non-effective marketing strategies, and competitive challenges. Sometimes a higher CAC may be tolerable if the Customer Lifetime Value (CLV) justifies. It.
3. Customer Lifetime Value (CLV or LTV)
Why It Matters – CLV measures the total revenue your business can expect to generate from a customer over their lifetime as a customer. It helps you understand the long-term value of your customer relationships.
How to Calculate – To calculate CLV, use the following formula:
| CLV = | Average Purchase Value x Average Purchase Frequency |
| Churn Rate |
Average Purchase Value – The average amount a customer spends in one purchase.
Average Purchase Frequency – How often, on average, a customer makes a purchase.
Churn Rate – the rate at which customers stop doing business with you.
Example: Let’s say your average purchase value is $50, the average purchase frequency is 4 times per year, and your churn rate is 10%. The CLV would be:
| CLV = | $50 x 4 | = $2,000 |
| 10% |
What It Means: Increasing CLV can be achieved by improving customer retention, increasing purchase value, and boosting purchase frequency. Focusing on customer satisfaction and loyalty programs is one way that can help maximize CLV.
These three simple KPIs – Revenue Growth Rate, Customer Acquisition Cost, and Customer Lifetime Value – can provide valuable insights into your business’s performance and help guide your decision-making. Regularly tracking and analyzing these metrics will enable you to make informed adjustments to your business strategies and drive growth and success.
