Whether you’re growing your side-hustle into a full-on business, working to take your company to the next level, or simply trying to keep on top of what’s working and what isn’t, one thing’s for sure: you need to have some form of small business KPIs to measure against.
If you’re unfamiliar, KPI is an abbreviation for Key Performance Indicators. It refers to measurable terms that demonstrate how effectively a company is achieving its business objectives.
Understanding and monitoring these terms can help give you a strong understanding of your business’s successes as well as its opportunities for improvement.
8 Small Business KPIs You Need to Track
While KPIs can vary widely for each company, there are a few fundamentals that apply no matter your business or industry.
1. Revenue
In nearly every business across every industry, the goal is to make money. That’s why tracking your revenue is something you need to track closely.
Revenue refers to the amount of money your company takes in before any expenses are taken out, and it’s most likely the lifeblood of your business.
2. Net Profit
Your net profit is the amount of money your company makes after it’s paid out all of its expenses, such as staffing, materials, marketing, and more.
And, given that your business needs to make more profit than it has expenses in order to survive, you’ll want to track your revenue over time. Ultimately, while net profit might fluctuate, your goal is most likely for it to grow year-over-year.
A quick way to calculate your net profit is with this formula…
Net profit = revenue – expenses
3. Custom Acquisition Cost
Another thing that’s important to understand is the exact cost of getting a new customer or client for your business.
This might not be as important in the early days but, as your business grows, it’s something you’re going to want to know.
The term “customer acquisition cost” refers to how much money you need to spend to bring in a new customer, and you can calculate this with the formula…
customer acquisition cost = (sales expenses + marketing expenses) ÷ number of new customers
4. Lifetime Value
If you’re wondering how much is worth spending to acquire a new customer, it’s worth calculating the LTV—or lifetime value—of that one customer.
Understanding this KPI can help you decide how much money to allocate to sales and marketing and to ensure you’re not spending more to acquire a customer or client than they’re actually worth.
There are a few ways to calculate this, depending on how your company operates.
If you work on a retainer model, where you’re paid on an ongoing basis, you’d calculate LTV with this formula…
LTV = average retainer price per month X average number of months a client works with you
On the other hand, if you work on a project basis, this can be a bit more challenging to calculate and will require some estimation, but looks like this…
LTV = average/estimated number of projects with client X average/estimated cost of each project
So, for the sake of argument, if your average client’s LTV is $1,000, you’ll want to ensure your acquisition costs are lower than that—by as wide a margin as possible.
5. Web Traffic
If you have an online business—or even if you simply use a website to attract new leads—having an understanding of your website traffic is a good KPI for how much attention your company is getting.
You can use simple metrics on Google Analytics to help you track your traffic over time. This can be an indicator of:
- How well your marketing or advertising is performing
- Whether your business is gaining word-of-mouth and referrals
- If your Call-to-Action is effective
6. Conversion Rate
Another vital small business KPI is your conversion rate. This term refers to how many of your leads or prospects actually become customers.
And you could figure this out in a few ways, depending on the type of business you run, including:
- Online businesses: If you sell products exclusively through your website, you could calculate your conversion rate by looking at your web traffic vs. the number of people who purchase. So, if you had 1,000 unique visitors to your website and made 25 sales, your conversion rate would be 2.5%.
- Service providers: If you proactively seek new business, your conversion rate would be similar to the last example, except based on the numbers of customers or clients you pitch vs. how many hire you.
The way in which you calculate your conversion rate will vary depending on your business model and industry, but the same principles apply.
7. Client or Customer Satisfaction
When you sell a product or service, having customers who are satisfied with what you offer is critical.
Satisfied customers end up becoming repeat customers, in turn driving your bottom line.
You can measure customer satisfaction through things like surveys and scores like the Net Promoter Score, which measures customer experience and predicts business growth.
As an extension of this, you can seek testimonials from satisfied customers that you can use as a form of social proof to drive credibility and consideration for your business.
8. Churn Rate
Your churn rate calculates how frequently customers stop using your product or service over a given timeframe.
If your churn rate is high, you may need to:
- Change something about your offering
- Better nurture your customers
- Lower your customer acquisition costs
- Provide better customer service or quality
To calculate your churn rate, use this formula…
Customer churn rate = (customers at the beginning of the month – customers at the end of the month) ÷ customers at the beginning of the month
The industry standard for churn rates can vary, so do some research to find out what your benchmark should be.
As your business grows, it’s important that you’re able to measure its success. That way, you can tweak and adapt in order to make your company as successful as it can be.
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