In a previous MoneyInc article titled Small Business Cash Flow: 5 Do’s and Don’t’s to live by, we closed our discussion by saying, “Know your numbers. Data is useless until it’s transformed into actionable information.” Let’s explore that concept deeper today. What are the key performance indicators (KPIs) necessary to monitor in your business?
Let’s start with defining a key performance indicator. A simple example is the dashboard on your car – your odometer shows how fast you’re going, whether the check engine light is on, how much gas is left in the tank, etc. The car becomes more difficult/dangerous to drive if you’re unable to monitor these critical systems. Similarly, without the proper metrics available to you on how your business is performing you could run into the financial equivalent of running out of gas, receiving a speeding ticket, or worse.
Each business will have a combination of its own KPIs that are valuable to its operations. Previously I was CEO of a ticket resale company, where the most important metrics were focused on the success of our digital marketing efforts.
At my current firm, ValueStreet small business investors, we see multiple unique business models a day. As we consider investing in each business, part of our investment process is determining the most important KPIs to drive the business’ success. The KPIs for a restaurant are different than the KPIs for a swimming pool maintenance company, which are different than the KPIs for just about any business you can name. Regardless of industry, KPIs have the same goal: providing up-to-date information on the health of your business and what you may need to adjust to improve success.
Below are examples to give you an idea of KPIs for various industries and which may be best for your business.
Profit per Impression – the digital marketer’s holy grail
The primary cost of my ticket resale business was digital advertising – the ads you see on Google. Google does an excellent job of providing stats for each “campaign,” such as how many times an ad is viewed and clicked. Unfortunately, a business doesn’t run on clicks nor impressions. What keeps things moving is profit. Shortly after launching the business I zeroed in on a KPI that measured the overall health of our campaigns: profit per impression. This metric is particularly useful for a digital marketer because it encapsulates so many other metrics into one useful number. For example, if our profit per impression numbers were performing well, we could reasonably assume we were advertising for keywords relevant to our customers, our keyword quality scores were steady or improving, and our bottom line was steady or rising as our campaigns grew. Not every industry will have a magic ratio like the one I used in digital marketing, but over time you will almost always find a few that serve as powerful indicators.
Net Sales – it comes down to the bottom line, but it all starts at the top
As the ticket business was a transaction platform a large chunk of our profits were driven by the service fee we charged per transaction. Our competitors charged a rate around 28% and initially we were charging a fee of only 18%. Was 18% the right number? Our customer base was strong and we were profitable, but we had to ask ourselves if our customer base could be just as strong if we raised the fee. We slowly started to experiment by raising the service fee and isolating other changes. By reviewing net sales – not just straight sales as we needed to consider refunds, etc. – we were able to determine at what point raising the service fee would actually decrease the number of transactions on the platform. Through experimentation and monitoring our net sales, we were able to increase our bottom line by raising the fee while not impacting the number of transactions on our platform.
Customer Satisfaction – keep them happy and they’ll keep you happy
Not all customers are created equal (at least when it comes to the amount of money they spend with your business). Customer satisfaction is important across the board and it’s absolutely critical for your repeat customers. As we evaluated a local restaurant chain as a potential investment, we interviewed successful restaurateurs and one shared their repeat customers (which they defined as visiting the establishment more than once in the most recent six months) spent on average 33% more per ticket than a non-repeat customer. Understanding the dynamics of your repeat customers (and how to serve them) can be an immensely profitable undertaking. If you operate a restaurant, how often is the customer returning to your establishment in a defined measure of time? And when they do return, are those repeat customers ordering the same menu item each time? If so, that should probably be a menu item you continue to serve and maybe even one you highlight to customers who may be experiencing your restaurant for the first time.
Gross margins – the foundation to evaluating service lines, products, and where you should focus
Continuing with our restaurant example, if a hamburger sells for $5 and a pastrami on rye sells for $15, do we want to sell more hamburgers or more pastrami on rye? Well, first we must understand how much each of those sandwiches cost us to make. The pastrami may sell for $15, but if it costs us $14 to make that means we only gross $1 per sandwich. The hamburger selling for $5 may only cost $2, which means it’s grossing $3. Based on gross margins alone, we should try to sell more hamburgers and evaluate if we should even be selling pastrami. Costs of raw materials (sandwich ingredients in this case) isn’t the only item to consider in gross margins. What are the costs that increase for each product or service you sell? If people are involved, as is the case in a service-based business, keep in mind the costs of the person providing the direct service or creating the product are part of the gross margin. These are direct variable costs and impact the margin gained for delivering service. If one job can be done in half the time as another job, or one product can be made in half the time, and they both bring in the same revenue, focus will likely be on the service line that requires less human touch.
Productivity metrics – always important, often misused
Productivity is often considered how fast something can get done. There’s a fine line when measuring productivity since ultimately what is measured gets rewarded. If the service techs of your pool maintenance route have the impression all you care about is how many pools they service in a day, then those pools may get done, but they may not get done well. Instead, make it clear the tech’s ultimate performance is judged on how many of their customers are retained. If a customer is lost because they moved or had a financial burden, that’s one thing. But if the customer is lost because the pool turned green or someone didn’t show up when expected, that’s a different story. The productivity metric is helpful to clarify what can be done differently to improve operations. A pool is supposed to take 45 minutes a week to clean, but it’s taking 90 minutes – what’s going on? Do we have the right equipment to enable the tech to do their job? Is the technician having to corral a dog in the backyard for 15 minutes before they can actually get to work? Once we learn what’s causing a slip in productivity, we can identify an action to improve the process (e.g., politely ask the homeowner to keep their dog inside on service days). Or if nothing can be done, then the expectation can be adjusted. If done right, highlighting productivity can be a partnership with your employees to show you are focused on removing the barriers that make it unnecessarily harder for them to do their jobs.
At the beginning of this article we introduced the concept of business KPIs relating to a car’s dashboard. In reality, running a business is more closely related to flying an F-16 fighter jet. The stakes are higher, the information you’re evaluating is drastically more complicated and nuanced, and you’re having to focus in 360-degrees. However, just like a pilot plots a flight path, by organizing your KPIs for the goals your business needs to achieve, you can ensure when your business takes off, you’re prepared for the flight.