Are you wondering why growth and scale aren’t happening as you hoped?
Perhaps you are fixating too much on lagging indicators like Monthly or Annual Recurring Revenue, which while crucial company goals, do not drive predictable and scalable growth.
Peter Drucker, a management consultant in the 1950s and 60s, strongly advocated the use of measurement in business. He believed that the key to successful management is measuring accurately and effectively. He argued that managers must continually ask themselves what they should measure and how they should measure it. Drucker also emphasized the importance of setting goals, developing performance standards, and tracking progress toward those goals. He argued that measuring results was a critical tool for understanding how to improve performance. Drucker argued that managers must ask themselves what information is needed, how it should be collected, and how the data should be leveraged. He also argued that measuring performance should be used to reward and motivate employees.
What to measure? My philosophy on Key Performance Indicators (KPIs) is that you fixate on no more than ten or eleven as an organization. Here are some examples I typically recommend using:
- Time in the app or on page
- The number of Daily Active Users (DAU), Weekly Active Users (WAU), and Monthly Active Users (MAU)
- K-Factor – This measures the virality of your product or service. Ideally, target a K-Factor of 6, which means every customer will recommend you to six other potential customers
- ARR – Annual Recurring Revenue
- MRR – Monthly Recurring Revenue
- CAC – Customer Acquisition Cost, The formula for calculating customer acquisition cost (CAC), is Total Marketing Costs / Number of New Customers. I recommend that you be super conservative in calculating this, so your stakeholders believe the number. Total marketing costs include all expenses associated with acquiring new customers, such as advertising, discounts, promotions, and sales commissions. Still, I recommend that you also include all your marketing and sales tool stack expenses. To calculate CAC, you need to first add up all of your customer acquisition expenses for a given period of time, such as a month or a quarter. Next, you divide that total number by the number of new customers acquired during that same period. The result is your CAC.
- LTV Lifetime Value is a measure of a customer’s value to a business over the lifetime of their relationship with the business. It is calculated by taking the total revenue generated by a customer over their lifetime, subtracting the total cost associated with acquiring and servicing that customer, and then dividing the result by the cost associated with acquiring the customer. This calculation can be used to identify how profitable a customer is to a business and helps the business to determine how much it should be willing to spend to acquire new customers.
- CAC:LTV (Customer Acquisition Cost to Lifetime Value) ratio is a metric used to measure the effectiveness of a company’s marketing and sales strategy. It is calculated by dividing the total cost of acquiring new customers (CAC) by the total lifetime value of those customers (LTV). A high CAC:LTV ratio indicates a company is spending too much to acquire new customers and a low CAC:LTV ratio suggests the company is making effective use of its marketing and sales resources. The ideal CAC:LTV ratio investors typically look for is 1:3 or 1:4. This means for every dollar spent on customer acquisition, the company has generated at least three or four dollars in lifetime value.
- Unit Economics Unit economics is a method of financial analysis used to calculate the profitability of individual units of a product or service. It is a key component of financial modeling and is used to compare different products and services, assess their profitability and determine whether a company is achieving a competitive advantage. To calculate unit economics, the following elements should be considered: Revenue: This includes any revenue generated by the product or service and any revenue generated from associated services. Cost of Goods Sold (COGS): This includes the cost of materials, labor, and overhead associated with producing the product or service. Gross Margin: This is the difference between revenue and COGS, and essentially represents the profitability of the product or service. Operating Expenses: This includes any costs associated with running the business, such as rent, salaries, advertising, and other overhead costs. Net Margin: This is the difference between gross margin and operating expenses and is the bottom line profitability of the product or service. Unit economics can also be used to compare different products and services to determine which ones are more profitable and can help inform pricing and strategy decisions.
- Churn Churn is a term used to describe when customers or subscribers stop doing business with a company or service. It is also referred to as customer attrition or customer turnover. The churn rate is the percentage of customers who discontinue their relationship with a company during a specific period of time. It is an important metric for businesses to measure, as it reflects the effectiveness of customer retention and marketing efforts. The churn target you should aim for in B2B or B2C will depend on your business goals and customer base. Generally, a lower churn rate is preferable, as this indicates that your customers are satisfied and likely to remain customers for the long term. You should also take into account any industry standards that may exist in your sector.
- Revenue by Employee (RBE) Revenue by Employee (RBE) is a key performance indicator (KPI) that measures the amount of revenue generated by an individual employee. It is an important metric for a business as it can provide insights into the efficiency and productivity of its employees, as well as its overall performance.
RBE can help a company determine whether its employees are working efficiently and whether the company is making the most of its human capital. For example, a company with a high RBE may indicate that its employees are highly productive, while a company with a low RBE may indicate that its employees are not working as efficiently as they could be.
In addition, RBE can be used to compare the performance of different employees, departments, or even different locations within a company. This information can be used to identify areas for improvement, as well as to recognize and reward employees who are making the greatest contribution to the company’s revenue.
Overall, RBE is a valuable KPI for businesses that want to measure the efficiency and productivity of their employees and to understand the contribution that each employee is making to the company’s overall performance. By monitoring this metric, businesses can make informed decisions about how to allocate resources, optimize their workforce, and improve their bottom line.
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