KPIs

KPIs for successful businesses

Monitoring of a brands’ performance is vital to identify if it’s headed in the right direction. It is

Monitoring of a brands’ performance is vital to identify if it’s headed in the right direction. It is essential not just for your own benefit or management purposes, but also for your suppliers, employees, regulatory authorities and your customers. Key Performance Indicators, or KPIs, are the instruments used to measure performance. These are usually compared to set objectives, historical data and competitor’s performance statistics, in order to analyze how the business is performing [i].

While there are hundreds of measures that can be used to measure the success of a company, not many measures are wholesome, or always accurate. More often than not, the figures may be engineered to show results. This is why KPIs can be very important, in showing the big picture. By combining these into a performance dashboard, and sharing the results with the employees, a firm enables a culture of two-way communication. This is beneficial in the long run, informing employees including the top-level management, of the areas that need improvement [ii].

This article sums up seven of the most important KPIs for any brand, detailing their purpose, why they should be monitored, and how they can be managed.

  1. Customer Lifetime Value

Most companies nowadays are keen, on calculating the overall worth of a customer with respect to the revenue that they will generate for the company. In general terms, a company is using this KPI to gauge the return on the investments it has made. For brands, knowing their value to a customer is very critical for the business, particularly if it is a small or a medium sized enterprise. This process of calculation starts from the moment the customer has made contact with the company in the form of a purchase [iii].

Customer lifetime value

Source: klipfolio

This key indicator helps, in identifying a satisfied and loyal consumer’s average lifetime value to the business. To measure this KPI, some initial figures are needed. These include the average length of the contact period of a consumer with the organization in question and the gross profit margin (leftover profits after the payment of costs).

Lastly, an organization would need to know the amount of monthly sales that the average customers brings in. Thus, the lifetime value is defined as profits multiplied by the retention ratio (length of contact with the firm) divided by the following: (1 + Discount (%) – Retention (%)), where it is preferable to utilize the firm’s cost of capital or the internal rate of return on their investment as the discount rate. Although, the figure will never be exact, it is useful to estimate how much in sales would an average consumer stimulate [iv].

This identifies how quickly your customer will demand a product, and how much they can be worth to the business. Adjusting your product development rates and the introduction of new products according to the customer’s need can help in improving the customer’s value to the business. Simply put, this figure can reflect the success of new products and services, with an increase in customer value indicating success and a decrease indicating a failure, as suggested by Impact, a market research firm [v].

Marketing campaigns can also help to increase the average customer value, by making them visit more frequently, or increasing their purchase values by introducing promotional campaigns, such as discount coupons or service vouchers.

  1. Lead-to-Revenue Ratio

Rebecca Geier, CEO at Trew Marketing [vi], emphasizes on the need for lead to revenue ratio for all businesses in order to help meet goals for a company. It is an essential key performance indicator that can help to identify how many leads are required by a business, in order to achieve goals. It particularly requires the lead-to-customer conversion rate, which is another very helpful measure for success. The lead to customer rate helps, in identifying how many “clicks” or visits to a page will lead to one customer.

The lead to revenue ratio has three steps in calculation, the first one involving the total sales target set to be divided with the average sales revenue generated per customer. This gives the average number of customers required. Dividing the number of customers required with the lead to customer conversion ratio helps in identifying how many leads you will need to achieve the goal. These leads help identify how many people were attracted by the campaign, while the lead to revenue ratio identifies how many people actually spent money after being attracted by the campaign.

The final step in this process involves identifying the website visitors, by dividing these leads by the visitor to lead conversion rate. The final figure obtained gives you the required number of web visitors for achieving this goal. This metric is a wholesome measure to help identify how online businesses can achieve goals effectively, and within their marketing budget. In some cases, it can also help identify exactly what needs to be improved to increase revenues given the same amount of web traffic.

  1. Cost per Click or Cost per thousand Exposures

For brand awareness or brand marketing, Bruce McDuffee identifies that it is extremely important to compare the costs of marketing to the revenues generated by them. While revenues are easily evaluated through profitability metrics and ratios, they actually need to be compared to the cost being spent to increase them; that is the marketing investment. For this purpose, Cost per Click, particularly for online retailers and businesses, or Cost per thousand exposures is an important indicator [vii].

These can be used to identify how much digital marketing or other marketing activities have helped in increasing revenues, which can be analyzed through sales revenue per thousand exposures or per click. These can particularly be used to compare the effects of various different campaigns, and see which ones are least costly, with the lowest cost per click or exposure, and the highest revenue per click. These KPIs are relatively simple to calculate, involving costs of a campaign, and the traffic interacting with the advertisement, which can be generated through software.

What makes this ratio stand out is not just the fact that it helps in comparing costs with other costs or revenues, but also with respect to traffic or awareness, which can help when creating brand awareness, or an online brand presence. Thus, it is a complete measure, looking at two different ways of measuring success, or failure.

  1. Organic Traffic

Organic traffic refers to the traffic earned by the website on its own, without any promotional influence. While social media is very important, in terms of directing traffic to the page, and has become one of the primary ways to attract attention, there exists a debate pertaining to which type of traffic brings in more sales. For starters, organic traffic is not paid for, thus the cost per click for this traffic is actually much lower.

The advantages of organic traffic, compared to social media traffic are however, numerous. Search Engine Optimization can be difficult to understand, however, the visitors that are attained from such organic means are actually the ones, who will end up being customers.

As identified by Thomas Raybell [viii], a marketing director, search engines help match the relevant customers to your website, and thus, will bring to you customers particularly searching through your keywords, getting you the best match.

In simpler terms, the quality of organic customers is much higher, as well as their customer value to the business. Paying for traffic is just a short-term solution, rather than building or investment in longer term customer relationships. Moreover, if you identify a problem with your conversion rates, investing in organic traffic can help in improving them, and help you achieve your business targets better. In order to get this number, you can use market surveys or calculate the traffic coming in through links posted on social media.

  1. Sales Growth

One crucial way to judge the effectiveness of strategies adopted by the company is to measure the growth in sales revenue. This helps in monitoring sales levels and growth in an organization as well as aiding in the strategic decision-making process. Measuring sales growth metrics help monitor growth trends over a period of time which provides a clear view of a company’s performance and helps in ensuring that better decisions are being made for the business with respect to the strategy formulation. The trend can be shown for monthly or quarterly time periods. This metric helps in reinvesting in other strategies if the current ones seem to generate insufficient revenue. This trend analysis serves a valuable purpose for the long-term health analysis of the company with respect to its financials. Sales growth can be calculated by using the current sales revenue less sales for the previous time period, dividing by the sales in the previous period and multiplied by 100.

Sales growth: [(Current period sales – Previous period sales)/ Previous period sales] x 100 [ix]

  1. Social Traffic and Conversions

This indicator helps to measure the effectiveness of promotions using social media in generating traffic to a company’s webpage and goal conversions. It helps in quantifying the amount of website traffic that’s generated through each social media platform as well as the number of goals as a result of the visits. This indicator can measure the return on the investment made on marketing campaigns. By calculating the goal conversion rate for each social media platform, a company can assess the effectiveness of each one and focus on those strategies which yield high conversion rates [x]. There are several measures of this, with the most prominent ones being the number of customers reaching out to a company through the channel of social media. Another useful numeric representation is in the form of the percentage of traffic from the media channels. This provides the companies with a direction for investing in the appropriate medium of social media in order to draw out the maximum revenues.

  1. Cost of Customer Acquisition

The cost of customer acquisition (CAC) [xi] is defined as the cost incurred by a company in an attempt to convince a potential user to purchase and utilize the company’s product. The formula for this measure is total sales cost plus the total marketing expense incurred, and this sum is then divided by the number of new consumers that the company gained. The method of cumulative costs varies from one firm to the next as the inclusion of fixed and overhead costs in the sum of marketing costs depend upon each individual firm. For an e-commerce firm, this measure holds the most significance as it helps in the process of developing and implementing cost effective strategies that would produce better acquisition results. Another usefulness of this indictor is how it can be split into monitoring each individual consumer’s cost to see which particular segments of the market is costlier to acquire.

Customer-Acquisition-Cost-KPI

Source: klipfolio

Through the CAC value, a firm can better analyze the performance of its sales and marketing departments as well. For a quick glance at the slow pace of user conversion, this KPI is the most useful source.

Conclusively, out of the list of several hundreds of indicators, the use of these 7 indicators has been growing within the business domain today. KPIs function as the necessary tools for evaluating the success of any firm in the economy. The importance of these can be highlighted by the fact that social media platforms, such as Twitter and Facebook, already have built in mechanisms to aid in the calculation of the number of likes, visits to a page, or other metrics pertaining to the traffic on a page. Moreover, some of the world’s top marketing directors and marketing firms are increasingly emphasizing on the analysis of these metrics to ensure success.

From another perspective, the KPIs act as a benchmark within a company and, thus, they help in bringing the company to a minimum level of performance. These metrics can act as a key to ensure the business is on the right track to achieving its goals, or, in case of falling short, these metrics can help identify where the problem lies. Thus, they can highlight the areas that need improvement resulting in a greater synergy and managerial conformity at all levels within the organization. Thus, to make sure your marketing investment is being put to the best and most efficient use, these performance indicators are extremely important for any brand.

References:

About George Mastorakis

George is a co-founder of Mentionlytics supervising Financial Planning and Analysis and our Cloud Architecture. He is an Associate Professor on Emerging Technologies and Marketing Innovation. His interests include Cloud Computing, Web Applications and Internet of Things.