Tracking business performance has never been more important, especially for small businesses (SMBs). As markets become more competitive, SMBs need to make the most of their limited resources and finances to stand out and engage their consumers.
That’s easier said than done because even the smallest mistake can be quite costly. But imagine just how costly the mistakes are when you have no idea how many of them you’ve made.
Fortunately, the online landscape allows you to measure and troubleshoot nearly every move you make. By tracking some of the essential key performance indicators (KPIs) you can identify and remedy issues as they arise, assess the effectiveness of your strategies and adjust plans to capitalize on new opportunities.
What Exactly Are the KPIs?
Simply put, KPIs are measurable values that portray how effectively an organization, or in this case your small business, is achieving their pre-set goals.
For example, you can use KPIs to evaluate how effective your business is at reaching your target audience, your marketing campaign’s performance, client or customer satisfaction rates and so on.
You can set any measurable business objective you want and use KPIs to determine if your business is able to reach that goal.
Let’s explore some of the most essential KPIs for your small business, what they are and why you should track them.
1. Customer acquisition cost (CAC)
As mentioned earlier, small businesses often have limited resources and budgets compared to other large enterprises and well-funded organizations.
The customer acquisition cost (CAC) KPI allows you to determine how much it costs you to acquire a new customer. CAC can tell you if you’re overspending on customer acquisition, as well as if your costs are going up or down.
On the face value, trying to get your hands on as many customers as possible is vital for your SMBs profitability and bottom line. But if you think about customer volumes without the context of CAC, you are not seeing the big picture which is that you might be spending more to acquire customers than what the value they are bringing in.
To calculate customer acquisition costs, add the costs of marketing to the cost of sales and divide the sum by the number of customers acquired.
The result is the cost your small business has to pay every time you gain a new customer. This KPI can tell you a lot about your company’s financial performance.
2. Customer lifetime value (CLV)
This is another KPI that can tell you how profitable your SMB is, or how profitable it could be, for that matter.
The customer lifetime value (CLV) KPI complements CAC because it allows you to evaluate the long-term gains from a single customer.
CLV indicates how much profit your SMB has and will gain from an average customer during the total period of your business relationship.
Here’s an example:
Let’s assume that your CAC is around $300. The customer you’ve acquired makes a purchase of $300; once you account for the CAC, this customer has brought in $0 dollars. Now, if that customer continues to buy from you over time (think recurring sales, subscription fees and similar), their CLV will gradually increase and this customer will justify their CAC.
On the other hand, if your newly acquired customer spends less than their CAC, and then never returns, you are operating at a loss.
This may indicate that your SMB must work on improving customer satisfaction and retention rates or try to reduce the CAC.
3. Website traffic
Website traffic is an essential KPI for small businesses that operate online. Web traffic influences many milestones and goals, such as the number of leads, conversions, sales and so on.
There’s no formula that helps you calculate web traffic. Instead, you can rely on the tools like Google Analytics to tell you everything you need to know about your website traffic including how many new and returning visitors you had in a set timeframe, how much time they spent on your website, what pages they visited and so on.
Moreover, tools like Google Analytics can tell you where all this traffic originates from, such as social media networks, search engines or direct entries. This information helps you better understand your audience, as well as help you determine the efficiency of your marketing efforts.
Knowing where your traffic came from allows you to evaluate the effectiveness of your digital channels and invest in those that show most promise. If your organic (search engine) traffic shows most conversions, you may want to invest more in SEO; if your LinkedIn traffic brings in most leads, you may also want to invest more in your LinkedIn presence and so on.
4. Bounce rate
The KPI that usually doesn’t get the attention it deserves is bounce rate. SMBs focus on web traffic which, without the context of bounce and conversion rates, could be just a vanity metric. Web traffic alone doesn’t tell you how effective your website is.
No matter how much web traffic you’re able to generate, if your leads leave your website as soon as they land, without interacting with it and exploring your offering, it is a red flag that you are losing prospects.
This can mean any number of issues ranging from poor landing page design to a slow page loading time.
A high bounce rate means more than lost opportunities. Consulting some of the best Chicago web design companies, we learn that bounce rates could affect your website’s SEO. Experts believe that Google uses bounce rates as indicators of user experience (UX) quality.
When measuring bounce rates, anything between 26% and 40% for is considered ideal for eCommerce and other landing pages. Once your bounce rate exceeds 70%, it’s a good time to sound the alarm.
Blogs, on the other hand, tend to have a higher bounce rate. 70-80% bounce on a blog post shouldn not be surprising.
5. Conversion rate
One of the most important KPIs to measure is, of course, the conversion rate.
A conversion is any desired action you want your users to complete on your website. This can be a successful online purchase, a request for a service quote or a product demo, subscription to your newsletter and so on.
The conversion rate is calculated by dividing the number of conversions by the total number of website visitors for a given time period.
Here’s an example:
Last month you had 1,000 people that visited your website and 100 of them have made a purchase.
The formula here is 100/1000 = 10%. Therefore, last month your conversion rate was 10%.
Your business can have more than one conversion type. You can set each of these as goals in your Google Analytics.
Our friends at a Miami web design company recommend tracking your 1) email subscriptions and product/service enquiries for top-to-mid-funnel users, 2) the more obvious goals such as successful purchase or request a quote for bottom-funnel users, and 3) return visits and purchases as loyalty conversion metrics.
6. Profit margin
As mentioned before, profitability is very important to small businesses. You want to make sure that your investments are turning a profit and that your company is growing. This is where profit margin KPI comes into play.
A lot of SMBs only look at the gross profit margin KPI. Gross profit KPI helps you determine profits you’ve earned after subtracting direct expenses, such as costs of marketing, for instance.
However, that’s only one side of the coin.
If you want to see where your company stands in terms of profitability, you should also track the net profit margin KPI.
Net profit KPI subtracts both direct and overhead expenses to give you a more detailed look at your company’s profitability.
If either of the profit margins trends upwards, your profitability is improving. But if any of the two is on a decrease, then you’re facing a financial issue that should be resolved as soon as possible.
These are the clear signs that your business needs an audit and strategic changes. With the firm grasp on all the metrics we have discussed here, troubleshooting your business should be easier. You will have more transparency over the many moving parts, from your digital marketing campaigns to your website performance and beyond.
Closing word
KPIs help you measure your SMBs performance and its ability to reach key milestones that bring you closer to your business goals.
If you’re not monitoring your company’s performance – whether we’re talking online channels, customer value or profitability – you won’t know for sure if you’re making any progress or not.
KPIs can not only help you reach success but they can also help you avoid costly mistakes and identify game-changing opportunities.