How do you know which metrics help you succeed?
Vanity metrics is the mind altering drug of choice for many entrepreneurs. The bigger your ego, the more you want it. It makes you feel good.
Who would ever argue with the desire to want to feel good?
Sometimes vanity metrics are a sign of desperation. Other times they are a sign of naivete.
Here are some of the most common ego nurturing meaningless vanity metrics examples:
- Our advertising spend is up 50% this year.
- We have 5000 Facebook likes and 7000 Twitter followers.
- 1 million downloads.
- 10,000 registered users.
- Our sales team makes 2000 phone calls per week.
- We have 5000 products for sale in our store or ecommerce site.
- Our headquarters is in Manhattan/Silicon Valley/London – fill in your dream location that best strokes your ego.
- We have more office space than ever.
- We have doubled the number of employees in the last 24-months.
All of the above are meaningless vanity metrics. Why? Because none of them will help you make a single business decision. Let’s see how the above vanity metrics could be replaced by actionable metrics, the only metrics you should care about.
- Our advertising dollars resulted in 100 inbound phone calls with a sales conversion rate of 5%. The result is 5 new sales. Let’s say the dollar value of the five sales is $25,000. If the advertising cost $7,000 we have a profit of $18,000. Now, we have an actionable metric. An actual number that we can measure. We are not making a decision on how we feel. Instead, we measure the the performance on an investment in advertising and we can decide if we want to increase our advertising spend.
- The number of phone calls made or received is also useless because it doesn’t mean anything. Instead we need measurable results. Of the 2000 phone calls how many new leads did we receive? How many new sales did we close? If we know that we have 50 new leads, it give us something we can measure. But, let’s take it a step farther. What percentage of our leads convert into sales? Now, that’s a metric we can build on.
Actionable or Measurable metrics are the only metrics that should influence your business decisions. It’s true that actionable metrics require more work.
Here are some key examples of metrics that matter:
- Traffic – But not as an empty number, but how it relates to sales and conversions. 100,000 visitors that yields 7% lead conversion 15% of which becomes a new customer.
- Profitability – Profit isn’t everything but it is pretty difficult to build a business without it. I know there are those venture backed companies without revenue you hear about, but for most of us, that is not reality. Don’t confuse revenue with profit. Plenty of companies filed for bankruptcy with record revenues. Volume can’t make up for the lack of profit.
- Margin – No success is possible without a healthy profit margin. It directly impacts risk and return. Fear and lack of confidence leads to prices too low to maintain profitability. Every entrepreneur should know the exact profit margin necessary to stay profitable.
- Sales conversion rate – Nothing happens until you sell something. Serious sales organizations live and die by sales conversion. They constantly seek to understand it and improve it.
- Revenue per employee – Productivity tells CEOs how efficiently a company operates. Google’s revenue per employee is at $1.2 million while Starbucks’ is under $100,000. It is less important how many employees a business employs than the total revenue generated for each employee.
- Year over year revenue growth – Comparing the present with our past is key. Revenue growth doesn’t tell the entire story about a business, but it is an important number.
- Customer retention/Churn – Some of the most successful companies are built on recurring revenue. If your business relies on repeat business, customer retention should be on top of mind. If your business lacks a recurring revenue source, make it your mission to develop a recurring model.
- Lifetime customer value (LCV) – One of the most important numbers to predict net profit is LCV. It is what helps management assess the financial value of each customer.
- Cost to acquire customers (CAC) – Once you have identified your LCV you know how much you can afford to spend on your CAC. Maintaining a healthy ratio between your LCV and CAC is important to scale sales.
- Overhead costs – Your overhead is a dollar amount of expenses your company would incur even if it never sold anything. Depending on your business, overhead may be a fairly constant number or it could wildly fluctuate. The key her is to know understand that number.
As a successful entrepreneur you must be able to define each of your metrics by numbers. For example, your margin is not “pretty good”, it is a real number like 37% and your sales conversion isn’t “better than ever”, it is a measurable number like 15%. Don’t ever settle for defining your metrics by words, always insist on numbers. If you can’t count it, you can’t manage it. Those that succeed stick to real metrics that tell cold facts about business.