There comes a point in every business’s life where it’s time to grow up.
In the beginning, many businesses are run with a heavy focus on getting leads and customers. The bank account is closely watched, but only so we can be certain to not run out of cash. Over time, this shoot- from- the- hip approach needs to give way to tracking some numbers that show you how different parts of your business are performing.
These numbers are called key performance indicators, or KPI’s.
By tracking a handful of numbers that correlate with your business’s health, you’ll be able to identify and isolate problem spots that need to be addressed. You’ll also notice issues before they get out of hand and adapt accordingly.
The concept is simple enough, but how do you decide what numbers to track? Ultimately, this is an art, and requires some trial and error. The key is to get started and track some numbers, then create a system of periodically reviewing the insights.
A simple way to look at KPI’s is described in Mike Michalowicz’s book Clockwork. You can break down your numbers into four categories; Attract, Convert, Deliver, and Collect. While the exact metrics will vary from business to business, you’ll want at least one number from each category, and most businesses will do great with around five to eight total numbers. This should give you enough data to look for trends, but not so much as to be overwhelming.
Before I break down each of the four categories, let’s get one thing straight…
If you’re not currently tracking key metrics for your business on a weekly or monthly basis, you’ll want to open up a spreadsheet and start tracking today. Every business needs some kind of dashboard that tracks key performance indicators.
The sooner you start tracking, the sooner you’ll be able to run your business by the numbers.
All businesses need to let their potential clients know they exist. We can think of the numbers in this bucket as measurements of our marketing efforts. Examples of “attract” numbers could be new email subscribers, requested strategy sessions, phone call inquiries, etc.
We want to keep this as simple as possible to start, but there’s one nuance worth considering; separating “prospects” vs “suspects.”
This is a distinction clarified by my pal Pete Williams in his excellent book Cadence: A Tale of Fast Business Growth. Suspects are defined as the tippy top of the funnel; this is anyone who comes into contact with your business in a casual way. Prospects are more qualified suspects who’ve taken some action to demonstrate more serious interest in your business. This will vary from business to business, but an example could be counting email inquiries as “suspects,” and counting confirmed sales appointments as “prospects.”
If your “attract” number is low, you’ll need to look at your marketing efforts. And this is where we need to whip out our monocle and become the Sherlock Holmes of your business. It’s detective time!
Maybe you need to diversify your marketing; if you’re leaning too heavily on digital, maybe you need to get out in your community and/or find speaking opportunities. Maybe your marketing messaging isn’t doing a great job of sharing the benefits with your target demographic. Perhaps you’re messaging and channel are great, but you’re simply not spending enough money.
- Want help attracting your dream clients? Check out this article HERE
Once you’re tracking your marketing efforts, we’ll want to play close attention to how many of your prospects actually buy your services. This number is referred to as your conversion percentage. This metric will show you how effective you are at moving your prospects to take action and commit to working with your business.
To find the conversion percentage, divide the number of new clients/ customers by the number of prospects (potential new clients/ customers). Conversion rates will vary wildly from industry to industry, but the main goal will be to track and improve your numbers over time.
If this is a bottleneck, you’ll need to look at the sales process. If you sell your product or service online, you’ll want to look at sales copy. Are you successfully addressing obstacles and offering a clear call to action? Are you removing the risk with a money back guarantee? Are your testimonials compelling and relatable?
You’ll also want to look for inefficiencies or “frictions” in the process that make it harder to buy. This could be a clunky payment processor, having too many steps in the funnel, or a sales page design that makes it hard to find the “Buy Now” button.
For in-person sales processes, you’ll want to review your sales script. And remember, your job is to figure out the actual issue; sometimes the sales script itself is great, but your salespeople are wandering off the reservation and going rogue. This is why organizations with multiple sales people should track conversion percentages for each individual.
- Struggling with your sales conversion percentage? Check out this article HERE.
It’s also important to track numbers around your ability to actually execute on your promises. In other words, how satisfied are your customers and clients?
Retention is an obvious “Deliver” number to track. But for some businesses (MFF being one of them), this is usually a bit too late. To be clear, we certainly track retention, and you probably should too. But if our retention is dipping and Ninjas (members) are choosing not to renew 12- month- memberships, it may mean something’s been going awry for months. At MFF, we do weekly surveys to keep our fingers on the pulse of MFF and invite Ninjas to give us real-time feedback. We then track these ratings from week to week and look for trends.
Additionally, the beginning of your relationship with your clients is an important time to develop trust and set the tone. That’s why we do individualized email check-ins with Ninjas after their first two months. The email is a single question; “On a scale of 1-10, how likely are you to refer MFF to a friend?” If we rank 7 or below, we know we have an issue and need to find out where we’re not meeting their expectation.
Based on your business, this initial check-in could be anywhere from one to twelve weeks. This could be done with an anonymous email or an informal check-in phone call. Regardless of how you do it, consider creating a KPI to track new client satisfaction.
- Want more help with retention and gathering feedback? Check out this article HERE.
- Want to make sure you have a successful onboarding of new clients? Check out this article HERE.
This is where you track cash in the business.
For many businesses, this number will show how successfully you’re collecting your owed payments. For some businesses that receive cash upfront, you could consider tracking numbers like request for refunds.
I would also put specific financial numbers like revenue, expenses, and profit in this category. Related, keeping track of your monthly profit margin is incredibly important. As businesses grow, it’s not uncommon for the margins to go down over time, so it’s good to keep track of ballooning expenses.
Yet another helpful finance metric is average client spend. Small improvements here can add up over time. Particularly because it’s often easier to provide more solutions to your existing clients than going out and finding new ones.
Now listen, you’re a BFU reader; I know you’re in business to make impact, not just make money. But rest assured, if you run out of cash… it’s game over. Furthermore, a marker of a well-run business is profitability. So if you’ve had your head in the sand in regards to your business finance, we need to take action today.
- For most small business owners looking for a crash course in finance basics, I HIGHLY recommend Greg Crabtree’s Simple Numbers and Mike Michalowicz’s Profit First. They’re incredibly easy to read, and will give you a good grasp on the basics of small business finance.
NOTE: The more averse you are to thinking about money, the more important it is that you read those books!
Some Final Considerations
Here are a few final thoughts on KPI’s
- What gets measured gets managed. But you can’t always directly measure what matters. Some of the more subjective numbers (like client satisfaction) can get close, but knowing your numbers doesn’t replace your qualitative sense of how your business is doing. That said, numbers can help point you in the right direction and potentially confirm or deny your imperfect intuition.
- Although it’s useful to look at industry benchmarks, ultimately, you’re looking to compare yourself to your previous performance. And if you have any kind of seasonality in your business, year-over-year comparisons are more helpful than month-over-month comparisons. But this means you need a couple years of data to start making good projections. And making good projections is key to holding your business accountable, as you want challenging but realistic targets to hit for each metric.
- The most helpful metrics are leading indicators. These are ones that tell you in real time what’s going on. Lagging indicators, on the other hand, reflect on what’s already happened. While they’re still good to know and often easier to track, lagging indicators don’t let you respond in real time. For instance, if you close out your monthly finances on the 10th of the month, and review the previous month on the 15th, you may see you took a major dip in new clients. But since you weren’t tracking in real time, you’ll now have to piece back together what happened as long as six weeks ago. On the other hand, weekly client satisfaction scores let you follow-up in real time to negative feedback.
- As your business grows in complexity, you’ll want to adjust your KPI’s accordingly. For a great soups-to-nuts overview for those looking to go deeper on KPI’s, check out Gino Wickman’s Traction: Get a Grip On Your Business.
Remember, tracking metrics doesn’t tell you what’s going wrong; it just highlights where there are issues. This can be frustrating when you hammer away and struggle to see numbers improve. But ultimately, this approach to methodical problem-solving can be the most creative part of business. With the right mindset and the right data, it can actually be fun to play detective with your business.
I wish you happy tracking!