When looking at businesses and deciding which ones are worth investing in and which to avoid, it’s often easy to just check out obvious information like the number of customers or yearly revenues. However there are many more metrics, which should be measured on a regular basis to really determine if a business can succeed over the long term and if it’s more likely to contract over the coming months and years.
Analysing metrics helps in identifying problems before they become major, as well as discovering areas where growth could be further exploited. Tracking insights can enhance business reputation, and also make it easier to plan for the future. The following are some top metrics, which companies across a range of industry sectors should consider analysing.
Customer loyalty and retention
Among the most important metrics for companies to monitor – but one that many business people don’t think about enough – is customer loyalty and retention. When customers are loyal to a business, they buy on a regular basis, purchase in higher quantities and will tend to commend the firm to friends and other contacts – which helps to bring in new customers. Each of these benefits potentially boosts a company’s bottom line.
Conversely, when the company has a high turnover rate – whereby its customer retention levels are low and clients typically buy once and then never again – indicates a variety of problems within the business that need addressing. There might be issues with your customer service, product quality or shipping methods for example.
To measure the firm’s customer loyalty and retention rates there are several different methods. The firm may send out regular customer surveys to get an idea of these metrics or, alternatively ask customers directly for their feedback at the time of purchase.
Alternatively, they can analyse customer purchases to ascertain the percentage of clients who buy more than once; how many times on average a customer purchases from the business; and what the average amount of their transactions are. No matter which option(s) are tested, each should be applied systematically.
Customer acquisition cost
A further vital metric that each business should measure is the price paid to land each of its new clients – known as the customer acquisition cost (CAC). This shows what the total cost of securing a new customer amounts to when costs such as marketing and sales expenses are factored in.
Using the metric will determine where exactly precious marketing and sales dollars, euros or pounds are being spent, and how worthwhile these costs actually are. Hopefully, investment in strategies such as search engine marketing, advertisements and the like will be paying off, but when the customer acquisition cost exceeds the money each customer brings into the business over the long term, then sales and marketing efforts should be examined to find more economical options. It should, however, be borne in mind that typically the CAC will lessen as the business grows and its services or brand becomes more established.
CAC is calculated by dividing total customer acquisition costs over a set amount of time by the number of new customers accumulated over the same period. Information gained from analysing this metric not only establishes whether the valuable advertising budget is effective, but also to determine when the best times of the year to acquire customers may be, as well as to notice trends about a particular target market.
Lifetime value of a customer
A metric that can be seen as essentially the other side of the coin to CAC is the lifetime value of a customer. Basically, this number is a prediction of the net profit that can be gleaned over the course customer. Basically, this number is a prediction of the net profit that can be gleaned over the course of a relationship with a customer. It helps with understanding of the company’s specific client base, and towards making important decisions within the business in areas such as marketing, sales, customer service and product development.
Working out the lifetime value of a customer helps in predicting how much repeat business can be expected over the years which, in turn, will make it much easier to decide how much money to spend on “buying” each new customer.
The easiest way to estimate the lifetime value is to take the average value of sales and then multiply this figure both by the number of repeat transactions and the average number of months – or years – that a typical customer is retained.
For example, a firm operating a membership business where customers pay £10/US$14 for a service each month and they are retained as a customer for two years, then the lifetime value would be £10/US$14 x 24 months = £240/US336 (or £120/US$168 per year).
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