A company’s success is measured by the consistency of results. While short-term and long-term goals are framed very carefully, it is crucial that on weekly and monthly basis the results are monitored. And, that’s exactly where Key Performance Indicators (KPIs) fit in; they are quantitative measures to monitor and track the weekly and monthly progress to ensure the business activities are in line with the business goal.
Often people use KPIs and metrics interchangeably.
Let us look at top 6 KPIs no business can afford to miss.
- Customer Acquisition Cost: For any business this metric is indispensable, it is the average cost you spend per sale to acquire a customer.
Customer acquisition cost (CAC) = Sales & Marketing Expense/ No. of new customers
CAC typically includes:
- Salary for your sales people
- Overheads (rent, utilities etc.)
- Paid Marketing(online and offline)
- Tools (software tools used in marketing and sales)
If the cost to acquire a new customer outweighs the average revenue generated per customer, you have a problem because you’re spending more money on marketing your products than the revenue generated from the product.
2. Customer Lifetime Value
Often CAC and CLV are confused. While Customer Acquisition Cost, encompasses all the AC encompasses the Cost of acquiring business and includes all your marketing efforts and CLV is the total worth to a business of a customer over the whole period of their relationship.
CLV = (Average Purchase Value X Average Purchase Frequency) X Average Customer Lifespan – Customer Acquisition Cost (CAC)
High CAV to CLV leads to an early closure in the business.
3.Burn Rate & runway:
The burn rate is:
- How much cash a business have
- How much business are using monthly
- How long it will take before businesses start generating revenue
Every month a company has fixed expenses and operating expenses and burn rate helps assess the total expenses per month and estimates the duration for which the current cash reserve will last. The estimated time period is called runway.
KPI
Monthly Burn Rate = Stating cash – Ending cash/no. of months
To simplify it, here is an analogy. Imagine a bonfire burning as your business and the wood is the cash. Burn rate tells you how long can the wood/cash last without having to add in more cash to keep burning/running the fire/business.
If your burn rate goes down your runway goes up, which means that if your expenses go down then your runway increases.
4.Customer Retention Rate:
Quantifiable measure used to track progress and evaluate success.
- Throughput Time
The time taken to procure the product or service and bring to a completed cycle.
Days Sales Outstanding (DSO) KPI
The average no. if days taken for the client to pay the company. From invoice to final payment.
