Monitoring key performance indicators (KPI) is an important element of tracking and driving company growth. In this article, we will look at five essential and quantifiable metrics that SME business owners should keep an eye on when planning expenditure on marketing and sales, discussing the significance of each metric, how to measure it effectively, how often to monitor, and how to interpret the data to make better-informed decisions.
1. Customer Acquisition Cost (CAC)
Your customer acquisition cost is how much money is required to make each sale. To maximise your margins and ROI, it is crucial to understand the effectiveness of your marketing and sales efforts, recognise your sales overheads, and which channels are the most profitable and efficient, and continually optimise your strategy accordingly.
How To Measure
Customer acquisition cost can be calculated by dividing your total sales and marketing expenditure by the total number of newly acquired customers during a specific period, e.g., quarterly, annually, or monthly.
CAC Per Sales Period = (Total marketing and sales expenditure) / (Number of new customers)
e.g.,
CAC Per Year = £12,000 / 16
= £750
Monitoring And Interpretation
AC should be monitored on a monthly or quarterly basis during an active marketing campaign, and annually at other times, comparing your figures to industry benchmarks and your historical sales data. If your acquisition costs increase, it might be necessary to reassess and adjust your marketing and sales tactics or explore more cost-effective or high-yielding channels.
2. Average Value Per Sale
Your average sales value indicates how much each customer contributes to your company’s coffers with each purchase, allowing you to optimise your customer acquisition costs and marketing tactics.
How To Measure
To calculate average sales value, divide your total sales revenues by the total number of purchases during a specified sales period. You may wish to divide this KPI into separate averages for new and existing customers if, for instance, new customers generally spend less than repeat customers.
Average Value = (Total annual sales revenues) / (Total purchases)
e.g., £560,000 PA / 77 purchases
= £7,273 average value
Interpretation And Monitoring
Ideally, your average sales value should be measured annually or quarterly. If your average value is lower than expected, you may wish to consider implementing upselling or cross-selling strategies or refining your pricing strategy. However, the average value is only really useful for businesses whose sales value is fairly consistent across their customer base. If your business derives most of its sales revenue from a small number of valuable purchases, with the majority of purchases being low value, you’re better off looking at the value gap between the lowest and highest values and investigating strategies to reduce this gap.
3. Customer Lifetime Value (CLTV)
The lifetime value of each customer represents the total revenue your business can expect to generate from a single customer throughout your business relationship. This metric is useful for several reasons, including helping you determine how much you should invest in acquiring and retaining customers.
How To Measure
To calculate CLTV, multiply the average purchase value, your average purchase frequency rate over a specified sales period (usually per year), and the average customer lifespan (years).
CLTV = (Average purchase value) x (Average purchase frequency) x (Average customer lifespan in years)
e.g.,
CLTV = £500 x 6(p/a) x 12 (years)
= £36,000
Monitoring And Interpretation
By definition, CLTV is an extremely crude metric, as it discounts any changes in average purchase frequency and value, e.g., due to upselling, cross-selling etc., and also ignores any price changes across the customer lifespan. Despite this, it is a central metric to consider when establishing your sales and marketing budget and making ROI calculations. It’s wise to monitor CLTV on a regular basis, focusing on trends and comparisons within your sector, and considering strategies to improve CLTV where necessary, including customer retention measures, upsell opportunities, and customer satisfaction initiatives.
4. Conversion Rate
Conversion rates are measures of how successful you are in persuading prospects to complete a desired action, such as downloading an eBook, getting in touch through your website, or purchasing a product. In practice, therefore, conversion rate covers several insightful KPIs, including lead generation, email marketing click-throughs, sales, etc.
How To Measure
Calculating your conversion rate for a particular channel or tactic is straightforward. Simply divide the number of completed actions by the total number of participants during a specified period, for example:
Website Generation Conversion Rate = (Number of email newsletter signups) / (Total number of website visitors per month)
or
eBook Conversion Rate = (Total number of inbound enquiries from the eBook – e.g., through a campaign phone number or email)/ (Number of eBook downloads per month)
or
New Business Sales Conversion Rate = (Total purchases by new customers) / (Total sales qualified leads per quarter)
Monitoring And Interpretation
Measuring your conversion rate at every step of your sales process will help you understand how effectively your sales and marketing initiatives are driving the desired actions, and will highlight areas for improvement. Keep an eye on any changes in conversion rate to determine whether adjustments are needed in your marketing channels, sales messages, or user experience.
5. Turnover Rate
Your customer turnover rate, or ‘churn rate’, measures the percentage of customers that cease doing business with your company within a year, quarter, or other sales period. Closely monitoring your turnover will help you identify customer retention issues and implement strategies to strengthen customer loyalty and value.
How To Measure
Turnover is calculated by dividing the number of customers lost during a sales period by the total number of customers at the beginning of that period.
Turnover = (Number of customers lost) / (Total number of customers at beginning of period) x 100 (To get a percentage)
e.g.,
Annual Turnover = 6 customers lost / 102 total customers x 100
= 5.9%
Monitoring And Interpretation
Benchmarks for turnover rates vary widely between industries and also fluctuate over time in response to market conditions. In general, however, the lower your turnover, the less you’ll have to spend on acquiring new customers, so monitor your own turnover closely compared to industry averages and take prompt action to address any spikes or unexpected increases. This may indicate an opportunity to improve your customer experience, review your pricing strategy, or diversify your product and service portfolio.
Find Out More
Inbound marketing is a data-driven approach to small business sales that provides objective insight into key metrics that help you improve your revenues and reduce your acquisition costs. To find out more, please contact JDR Group today.
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