How To Measure The Success Of A Business?
The definition of success is quite subjective and often varies from person to person. However, an entrepreneur can evaluate his/her business’s performance by using various success metrics, which are, technically, measurable data, which is manipulated to determine the attainment of the business efforts. These metrics usually differ based on business priorities and goals.
Top 4 popularly-used metrics for evaluating a business’s performance or measuring its success:
1. Break-even point, net income ratio, recurring revenue, ROI and ROAS
It refers to the amount of money a business needs to earn in a specific period to cover its costs and sustain itself. In other words, when a business owner manages to earn at least the amount he/she had spent, the business is said to have reached its break-even point. To measure the success of a business, the entrepreneur must determine if it is meeting, exceeding, or falling short of the spent amount. However, for some, especially the start-up owners, reaching the break-even point is often considered a success, and for others, like the profit-seeking established entrepreneurs, making more than the spent amount is the real achievement.
Profit or the net income ratio is the amount entrepreneurs take home after subtracting the expenses from the total revenue. This metric is used by business owners to understand if the business is prospering. A business is considered successful when it witnesses a steep growth of profit.
For businesses that run on a subscription-based model, measuring the monthly recurring revenue (MMR) turns out to be one of the most helpful success-measuring metrics. This metric refers to a business’s total monthly revenue, the number of customers who purchased its products/services, and how many have curtailed their monthly purchases. These are sales indicators that enable businesses to monitor the changes in customer behavior and make modifications accordingly.
To understand if an investment was financially worth it, one must measure the return on investment (ROI), which is the ratio between income and investment. A business’s ROI can be calculated by subtracting its goods/service cost from the overall revenue and then dividing the derived number by the price of the sold goods/services. A high ROI is what a business always aims for. When it comes to evaluating the success of marketing and advertising efforts, Return on ad spend (ROAS) is quite a useful metric. It helps to calculate the amount of money the advertisements have generated for the business.
2. Conversion and bounce rate of leads
To evaluate the performance of a business, owners can consider tracking the data related to marketing leads. Firstly, the generated leads are measured by adding up the total instances of contact with a prospective customer. Then, the converted leads are assessed by counting the generated leads that resulted in a sale. Finally, the conversion rate, which is the percentage of leads converted from the generated leads, is calculated. Also, entrepreneurs must not forget to measure the bounce rate, which is the inverse of the conversion rate. Bounce rate measures the number of visitors that visited the company’s webpage, but left immediately without interacting. It helps business owners to identify the gaps in their marketing and advertising efforts.
3. Customer Satisfaction
Customer experience can be measured to get valuable insights into a business’s performance. This metric primarily relies on brand-customer relationship-related data, which helps to monitor trends. Business owners who focus on enhancing customer experiences often witness substantial growth. There are 8 different customer-focused metrics, which are:
This metric refers to the percentage of customers that have made a purchase, registered on the company’s official site, subscribed to a plan, or performed another action that is defined as conversion by the owner of the company. The number of conversions over a certain period is divided by the total number of people that visited the website over the same period, and then the derived figure is multiplied by 100, to get the conversion rate.
Customer health score
This metric helps entrepreneurs track the number of new and repeat customers and the spending pattern of customers. Using this metric, one can get to know whether customers are satisfied or dissatisfied with the products/services.
Net promoter score (NPS)
It involves measuring the chance of a company’s existing customers recommending its products to others. NPS, one of the common measurements of customer loyalty, is determined by analyzing customer feedback.
Customer Satisfaction Score(CSAT)
Unlike NPS, which helps to measure customer loyalty, it enables business owners to measure customer satisfaction over a shorter time.
Customer lifetime value(CLV)
This metric refers to the profit that a business can expect to earn from a single customer over the period he/she remains its customer. CLV is calculated by multiplying the average purchase value by a customer’s average purchase frequency and then multiplying the derived number by the average lifespan of the customer.
Customer retention cost
It helps to determine the average cost of retaining each customer through their projected CLV. This metric measures the total cost of customer success efforts against the total number of customers. A business is considered successful when its CLV exceeds customer retention cost.
Customer churn rate
Also termed as customer attrition rate, it helps a business owner to get a percentage of customers who no longer use his/her products/services. Canceled subscriptions, unrenewed contracts, etc. are often considered in this metric. The churn rate can be calculated by dividing the total number of lost or churned customers over a certain period by the total number of customers in the same period.
4. Employee satisfaction
Many a time neglected, employee satisfaction is a crucial success-measuring metric. When employees stay happy and motivated, the rates of employee turnover and the need to redistribute resources automatically reduce noticeably. Hence, an entrepreneur must always make sure his/her employees are working in a positive environment and being offered immense growth opportunities.
Though business is unpredictable, one must constantly measure his/her business’s performance to understand whether the business is making profits, losses, or just somehow reaching the break-even point.