The Metrics That Matter Most

What do baking cookies and performance metrics have in common?

Everything.

If you’ve ever attempted to bake cookies, you know that following a recipe is key to a delicious outcome.

Well, the same is true in business. You need to follow the proven formulas to get your ratios just right, and to get the results you’re looking for.

For those who “eyeball” the ingredients, the risk of producing a sub-par cookie that no one wants to eat increases.

In business, if your performance metrics aren’t meticulously accounted for, you are sure to end up in a guessing game that yields stunted growth.

No recipe = no plan.

Knowing what to measure and how to measure it, are determining factors in your ability to attract investment, support business partners, and sustain the longevity of your business model.

Here are the seven key metrics we believe every business should track.

7 Key Performance Metrics

It’s time to effectively gauge your performance, pivot when necessary, and measure growth for optimal efficiency.

CAC – Customer Acquisition Cost

What it is: Customer acquisition cost (CAC) is the average cost to acquire a customer over a set period of time. You want to measure this because it will give you a leading metric to determine whether your marketing and advertising was profitable or not.

How to Calculate:

Spend ÷ Number of New Customers

Here’s a simplified example of how to calculate CAC: Let’s say over the past 30 days, you’ve spent $10,000 on advertising and you generated 2,000 new customers. That makes your CAC = $10.

LTV – Lifetime Value

What it is:  Lifetime value (LTV) is the average revenue generated from customers over the course of their relationship with you, while factoring in the costs related to serving them.

This performance metric should be one of the first that you turn to when building out your reporting system for your business.

Why? It will help you make better business decisions and give you the insight you need when deciding where to allocate your marketing budget.

How to Calculate:

(Lifetime Revenue – Lifetime Variable Costs) ÷ Number of Customers

Let’s say you’ve generated $1,000,000 in lifetime revenue. It cost you $300,000 to serve those customers, and you have 10,000 customers; The LTV of your customers is $70.

ARPU – Average Revenue Per User

What it is: Average revenue per user (ARPU) is similar to lifetime value. However, it doesn’t factor in the cost of serving a customer. It is a simplified revenue metric that will be easier to report, manage, and measure compared to LTV (helping you make decisions faster).

How to Calculate:

Total Revenue ÷ Number of Customers

Here’s a 30-day example: You are generating $100,000 in revenue per month and you have 2,000 active customers. Your ARPU is $50.

MRR – Monthly Recurring Revenue

What it is: Monthly recurring revenue (MRR) is a metric for measuring your predictable monthly revenue. This is important for planning your overhead, expenses, and anticipated growth.

MRR effectively tells you how much income was generated each month. In context, it is important to compare this performance metric to your customer acquisition cost, churn, and monthly account growth.

How to Calculate:

ARPU x Total Number of Customers

For example, if your ARPU is $100 and you have 5,000 active customers, your MRR is $500,000.

Churn

What it is: Churn is an important performance metric when you are measuring the success of programs that are billed on a recurring basis. For most businesses, this is on a monthly basis.

Churn is a leading indicator of customer retention. If people don’t see the value in renewing the services your company provides, you have problems to diagnose across email marketing, customer onboarding, etc.

In other words, churn points you in the right direction in terms of optimizing your product and services. Not only that, but it guides you toward optimizing your communication about those products and services to your clients.

How to Calculate:

(Number of Cancelations ÷ Total Number of Customers) x 100

Calculating churn is based on the number of your recurring revenue customers that cancel within the month. For example, you have 1,000 customers and 50 canceled in a 1-month period. Your churn would be 5%.

ROAS – Return on Ad Spend

What it is: Return on Ad Spend (ROAS) is the most basic performance metric you can use to measure your advertising. It is a calculation to see how much revenue is generated per dollar of advertising.

How to Calculate:

Revenue ÷ Cost

For example, let’s say you generated $5,000 of revenue from $1,000 in ad spend. Your ROAS would be 5; For every $1 you invested into advertising, you extracted $5 of revenue.

ROI – Return on Investment

What it is: Return on Investment (ROI) is the calculation you should use to evaluate the effectiveness of specific business activities. ROI helps you keep a pulse on specific initiatives and their impact on the business. It’s a key performance metric in your toolkit.

How to Calculate:

((Gain – Cost) ÷ Cost) x 100

The most commonly used context for ROI is in marketing or advertising. For example, let’s say you invested $25,000 in a billboard campaign and it generated $60,000 in revenue, your ROI would be 140%.

Or let’s go more complex…

Say you hired a chiropractor to come in once a month to provide your employees complimentary adjustments at a cost to the business of $12,000 per year.

After implementing the program, you find that employees take an average of one fewer sick days per year. With your team of 70 employees that work an 8 hour day earning an average of $35 per hour, you have recovered 560 working hours or $19,600 in wages per year.

So, your ROI on the chiropractor initiative would be 63%.

Quick Recap

While there are thousands of statistics and data points that are interesting to observe in business, it’s important to start and stick with the 7 performance metrics we covered today.

After all, they are the heartbeat of your business.

The performance metrics are intricately connected to one another. When you start pulling the individual levers, you’ll be surprised by the breakthroughs you uncover.

The transformation you will experience in your business can be traced directly to those metrics, allowing you the opportunity for iteration and scaling of your most effective strategies and workflows.

In the words of Michael Dell, “Anything that can be measured can be improved.”

What metrics are you excited to measure first?