William Thompson, also known as Lord Kelvin, was a British mathematician, mathematical physicist, and engineer. In a lecture on May 3, 1883, at the Institution of Civil Engineers, Lord Kelvin essentially said, “If you can’t measure something, then you don’t know very much about it.”
Of course, Lord Kelvin used a lot more words. But his message about the importance of using metrics is relevant nonetheless.
In this post, we’ll discuss what metrics are, different types of metrics, how to choose metrics for your business, and why you must measure and quantify data in business.
What are metrics in business?
In a business setting, metrics refer to measurements of specific quantifiable data points. This quantitative data is typically used to assess performance and productivity on organizational, team, and individual levels.
Metrics measure, monitor, and analyze many business areas, such as finances, operations, sales, employees, customers, and quality. These measurements can help you and other business leaders set realistic goals, track progress, and make informed decisions about business direction and strategy.
What is the difference between metrics and key performance indicators?
Metrics and key performance indicators (KPI) are used interchangeably. The two concepts are related, but they are different things used for various purposes.
Basically, all KPIs are metrics—but not all metrics are KPIs. Metrics are measurements or data points that can be used to report on, monitor, and analyze a wide range of business activities and performance. The information you get from the measurements of these various business activities is important but might not be critical to your business’ success. KPIs are strategically selected to align with and focus on the most vital business aspects, such as strategic goals and critical business objectives.
For example, your sales team might have a goal-oriented KPI of monthly lead generation. That KPI might include several metrics, such as page views, ad clicks, unique visits, SEO position, and email click-through rate. These metrics help achieve the lead generation goal of the KPI, but they are not necessarily goals themselves.
Why are business metrics important?
Business metrics help you monitor, manage, and improve the essential aspects of your business, like finances, marketing, industry competition, standards, customer expectations, etc. Ultimately, the metrics you decide to use should support your company’s priorities, strategies, and goals so you can make informed, data-driven decisions and quickly adapt to changing conditions.
How to define, set, or choose metrics for your business
Determining which metrics to use is critical and should be linked to your company’s objectives and desired outcomes. This means that you need to:
- Define and understand your company’s goals.
- Understand how your business compares to competitors in your market.
- Analyze historical data to understand what worked before and what needs improvement.
- Involve stakeholders, executives, department heads, and team members to get different perspectives on the most critical metrics.
- Determine which sources will be used to collect data about each metric.
In this example, we will define and set metrics crucial for measuring and optimizing your sales and marketing performance based on acquisition, conversion, and revenue.
These metrics focus on the ways you attract and acquire new customers.
- Traffic sources: Identify what drives the most traffic to your website/online store. This can include searches, page visits, social media engagements, direct marketing, existing customer referrals, etc.
- Visitor volume: Measure the total number of visitors to your website.
- Cost per acquisition: Calculate how much it costs to acquire each new customer based on the traffic source they used to find your products or services.
- Click-through rate: Measure how effective various ad campaigns are, based on how many clicks each generates.
These metrics help you to assess how effectively leads are converted to new customers.
- A conversion rate determines what percentage of visitors and leads become paying customers.
- The abandonment rate calculates how many customers place items in the shopping cart but don’t complete the purchase.
- A sales funnel measures the customer conversion rate at each stage of the sales funnel (awareness, interest, evaluation, etc.) so you can determine the bottlenecks.
- The customer churn rate assesses the rate customers stop buying your products and services.
Use these metrics to understand the financial impacts, such as cost per customer and return on investment.
- Total revenue determines your total revenue from all your sales.
- Acquisition cost per customer calculates how much it costs to get one new customer on average.
- The average transaction value measures how much a customer spends on a single purchase. To calculate, divide the total value of all transactions by the number of transactions.
- A return on investment measures the cost of customer acquisition against the total revenue generated.
Types of business metrics
There are a variety of business metrics that you can use to assess and evaluate different areas of your company’s performance.
Financial metrics measure your company’s fiscal health. These metrics include:
- Revenue, or the total income from selling products and services within a specific time frame.
- Net profit, the total amount left over after deducting taxes and other expenses.
- Gross margin, or the difference between total revenue and the cost of goods sold.
- Net burn rate, which assesses how much your company loses monthly.
These metrics monitor and assess your company’s operations and strategies. They also help you to establish performance benchmarks that will help you maintain current efficiency and identify areas for improvement.
- Production efficiency measures how effectively your company can manufacture products.
- Employee productivity lets you measure your employees' efficiency.
- Supply chain measures the success of your supply chain process.
- Quality measures factors that affect product quality, like supply chain issues, employee productivity, etc.
If your company provides software as a service (SaaS), these metrics can help you assess customer engagement and retention:
- Customer lifetime value projects the total revenue you expect through customer interaction with your services.
- A customer retention rate shows the percentage of customers staying with your products and services in a specified period.
- The daily or monthly active users rate helps you understand how many customers use your services daily or monthly.
Metrics in this category can help you measure how satisfied customers are with your products and services. These metrics include:
- Customer satisfaction score: The overall customer satisfaction in product performance, interactions with customer service, and experience with your brand.
- Customer complaint rate: The number of complaints you get can indicate how well your products are or are not meeting customer needs.
- Customer support response time: The amount of time it takes for customer service representatives to respond to inquiries or issues contributes to overall customer satisfaction.
Use these metrics to assess how well employees fit in your organization.
- The employee turnover rate measures the rate at which employees transfer out of your department or the company itself. A significant turnover rate can indicate a problem with how the company is managed.
- Employee satisfaction measures happiness in current position, work assignments, work/life balance, etc. The employee satisfaction metric helps explain employee turnover.
- Employee training and skills determine whether your employees have the skills needed to do the work and what training they need to develop skills.
This is not an exhaustive list of business metrics—what you decide to measure and quantify depends on your company’s vision and goals and the industry you are in. What’s most important is that your team has a solid way of tracking progress, so you’re always one step closer to your goals.
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