26 Jan FACT VERSES FICTION: THE TOP 5 KPI’S REALLY MATTER THE MOST
A KPI is a Key Performance Indicator. Note the word, “key” in this phrase, however. Companies regularly give their managers ten, twenty and sometimes even thirty or more KPIs by which they will be judged. How on earth can that number of things be “key”?
It’s a question worth asking since, if anything is guaranteed to kill a manager’s attention, it’s being asked to stay on top of too many metrics at the same time. What managers need is a few vital metrics that will really make the difference between success and failure.
Here are the five most important KPIs.
Not “revenue.” Recurring revenue. Revenue that comes back – that you collected this month, you’ll collect next month and you’ll go on collecting every month for the foreseeable future. It’s great to receive a huge one-off payment (and of course you’re probably not going to turn it down), but the cash flow that will build your business and let it survive doesn’t come from one-offs – it comes from payments you collect month after month. Payments you can rely on.
We list this first since it’s number one on our list of KPIs. Recurring revenue IS the single most important metric in your business. If you track nothing else, please track this.
Just as the secret to long-term success is recurring revenue, the key to recurring revenue is having customers that don’t leave. You need to monitor how many customers leave each month – the “churn” – so that you can see how successful you are retaining your existing customer base. If the number leaving is in any way significant, you need to find out why – what they don’t like about your service or what the competition offers that they like more – so that you can fix it. Fast. Otherwise, your business faces a rather dismal future.
How do you find out why customers leave? Ask them!
In just about every business, it costs more to recruit a new customer than it does to hold onto an existing one. So, if someone wants to go, you need to find out why. And – if people are staying – find out the reason for that, too. Measuring customer churn is the starting point to finding out what’s good about your offer and what needs to be fixed.
Cost Of Customer Acquisition
There’s a very, VERY simple way to calculate this cost: tally all your marketing and selling expenses and divide the result by the number of customers. It’s more useful if you do this month by month so that you know how much it cost you to win each new customer and whether the cost is increasing, decreasing or staying the same. If you find that each month you’re spending more to gain a new customer than you will receive from that customer, you need to do something about it before your bank manager does something about you.
A version of this KPI applies when you consider a stand-alone marketing campaign. Make sure you cost every single facet of the campaign and compare that total with the number of accounts won. Then you’ll know whether it’s worth running the same campaign again.
Growth in Revenue Per Customer
Revenue per customer is easy enough to track, and so is total revenue, but what this KPI is really telling you is about how successful you are in cross-selling and up-selling. If you only have one product and it only comes in one flavor, these are things you obviously won’t be able to do but a good offer should always include a range of products and various levels – Entry Level, Standard Level, Premium Level, etc. The name of the game here is to get customers to work their way up the ladder to Premium Level. Measuring growth in revenue per customer will tell you how successfully you are at doing that.
Customer Lifetime Value
The lifetime value of a customer is the total revenue you expect to receive from an average customer during the time that customer remains with you. By now, you should know what the average length of a subscription is, as well as the average monthly revenue per customer. Multiply one by the other for the most simple lifetime value figure. While there are other things you might want to introduce over time, this is a good place to start.