“If you don’t know where you want to go then it doesn’t matter where you are going”
Measuring business performance is not easy. But it is both fundamental and critical. Setting a strategic course is hard enough – but without appropriate measurement techniques and metrics we could be far from shore and marooned quickly.
What you measure is as much a function of why you want to measure. Your strategic priorities (how you want to drive value in your business) should drive what you measure.
So, what should you be measuring and how do you do it?
The imperatives of a start-up stage company are assessing product-market fit, demand generation and degree of customer adoption. These priorities would indicate that metrics such as the number of active users, growth of net new users per month, engagement minutes with the product, etc. would be relevant.
As opposed to a mid-stage company where growth rate of acquired customers is already high but you are keen to understand how sustainable this growth might be. This could translate to customer acquisition cost and customer satisfaction measures as more relevant metrics to consider.
Mature, multi-location, business-units driven company structure could have added operational priorities.
A simple strategic priority driven approach to bucketing metrics could be:
Unarguably the clearest indicator of demand and customer interest, Revenue metrics are of course vital to measuring the growth of your business. But don’t simply think of measuring Revenue as a single metric – compare your revenue growth with some form of a broader market growth rate to see how well you are growing relative to the market (it is impressive if you have been generating 25% annual revenue growth for the last 3 years – but if the market, i.e., your top 5 competitors, have grown by 30% each – your growth is suddenly not that impressive).
For pre-revenue companies look at early indicators of potential revenue, such as, number of free trials contracted per month or level of user engagement in minutes per day with you service.
Simple longitudinal trend analysis such as: Year-to-date Revenue % v/s Budget, Year-on-Year Revenue Growth % v/s Market Growth %, Revenue by Service Line £ and % v/s Market Growth %, Monthly or Annual Recurring Revenue £ and Growth %, etc. are some of the metrics with potential to reveal underlying strength in growth.
Choosing a margin metric can be a function of your line of business. Gross Margin % is typically valuable in sectors with high cost of goods or services sold such as Wholesalers or IT Services. While not an accepted accounting measure EBITDA or Earnings before Interest, Tax and Depreciation/Amortization deductions is a common measure of operating margin strength and a metric typically used in company valuations. EBIT is a commonly used measure of operating margin strength. Net Income %, SG&A% etc. can be used to understand overall level of cost efficiencies and ability to convert revenue to net margins in the business.
Understanding your customers gives you visibility into the sources of your revenue. Services organizations could be interested in understanding Average Bill Rate £ or Average Client Tenure Years. A useful (but often sparsely used) metric combining revenue and customers is Accounts with annual revenue > £1m. Other consumer centric metrics include NPS score, Customer Satisfaction Score and Average Revenue Per Account.
What you measure needs to be aligned with your strategic imperatives and choices you have made as an organisation to pursue. Implementing a reporting dashboard accessible to the CEO and management team for decision making can support evidence-based decision making.
CMC works with businesses, management teams and shareholders in understanding key drivers and business performance and then implementing performance management systems that help measure the underlying health of the business. To learn more, feel free to contact me directly or via the form below.