4 Key metrics

Process metrics are numerical or qualitative indicators that enable us to assess how well a particular business process is functioning. They can vary depending on the goals and characteristics of your business, but what they do is give you an objective picture of what's happening in your business. Remember: you can't manage what you don't measure.

Let's start with the first metric.

CAC (Cost of Customer Acquisition) – the cost of acquiring a customer. Every business knows that attracting customers requires financial investment. However, mistakes often arise when understanding this cost.
The first mistake is that many entrepreneurs confuse the cost of customer acquisition with other metrics like lead cost or click-through rate. This can lead to incorrect calculations and assessments of marketing effectiveness.
A second mistake occurs when calculating costs based solely on advertising expenses divided by the number of clients acquired.

In reality, the cost is much higher because all expenditures must be included, such as the marketing budget, employee salaries, software costs, and potential additional expenses.

So, if you spend 200,000 rubles on advertising in a month and attract 4 clients, the actual cost isn't 50,000 per client. That's because you've also spent another 200,000 on salaries, 50,000 on software, and 50,000 on additional expenses, such as evaluating a client’s scope of work. In total, 500,000 was spent on 4 clients, meaning each one costs 125,000. The math changes significantly!

LTV (Lifetime Value) – This metric shows how much money a company can earn from a single customer over the entire duration of their relationship. Often, people think that LTV is simply the average order value multiplied by purchase frequency. But that's not always the case.

Imagine you have a client who spends 20,000 rubles monthly and collaborates with you for two years. In this scenario, the LTV formula would look like this:

LTV = (20,000 × 12 months) × 2 years = 480,000.


Seems straightforward, right? But there are hidden pitfalls that are frequently overlooked.
We haven't accounted for additional factors such as seasonality, changes in the average check, and customer churn.

For example, if you lose 5% of your clients every month, your real LTV will be lower. Additionally, you should consider the costs associated with retaining customers, which might include discounts, gifts, and support expenses.
This includes not only monetary aspects but also the time invested by your team.

Doesn't this remind you of the situation with calculating the cost of customer acquisition? Simple division of overall costs by the number of customers can result in inflated or deflated figures.
In this case, if the retention costs for the client were 50,000 over two years, then the true LTV would be 480,000 - 50,000 = 430,000.

Next, we'll discuss ARPU, or Average Revenue Per User. This metric is essential for both digital and traditional businesses. It helps evaluate how much revenue each of your clients brings in on average over a specific period.

Calculating it is quite simple: the total revenue for the month (or another selected period) is divided by the number of active users.

Suppose your total monthly revenue amounts to 2 million, and you have 10 active clients.
ARPU = 2,000,000 / 10 = 200,000.


It's important to remember that ARPU gives us insight into the current situation and may not always fully reflect the real picture. Often, further segmentation of clients is needed since different services or segments of the business can have varying average checks and revenue per user.

For instance, we have project-based development, hourly development, support, and technical specification development. Each service has a different average check and revenue per user. Therefore, we calculate both an overall figure and individual segment-specific ones.

Average revenue per client is useful, especially when needing to quickly assess how successfully your business is operating from a profitability standpoint.

Churn Rate (CR) – This metric is often overlooked yet carries significant importance, as it reflects the percentage of clients lost over a given period, say, a month. This indicator serves to assess the stability of your business and the duration of client interactions with you.

How do you calculate it?
Assume you had 100 clients at the beginning of the month, and by the end, you had 95 left. That means the churn was 5 clients. The simple formula looks like this:

(5 / 100) * 100 = 5%.


However, similar to other metrics, this one has its nuances. Different industries may calculate it differently. Additionally, it doesn't always paint a full picture unless reasons behind the churn are considered.

For instance, your company might handle various project types: short-term and long-term, and churn rates might be higher in shorter projects due to their temporary nature. Thus, we analyze the churn rate for the whole company as well as for each type of project separately.

Essentially, these four metrics cover the company's activities at a high level. The cost per client indicates the performance of marketing and sales, the lifetime value reflects client development processes, the average revenue per user shows production levels, and the churn rate indicates the quality of service delivery. Subsequently, you can apply other metrics such as customer satisfaction, advertising costs, deal timelines, depending on your business objectives.
It’s crucial to avoid excessive numbers of metrics and focus on those contributing directly to achieving business goals.

Our example

At Sailet, we used three key metrics: revenue, margin, and customer satisfaction level. These play a vital role in assessing the effectiveness of our business and helping us make informed decisions.

Revenue allows us to measure the success of our marketing and sales efforts. An increase in revenue indicates that we're attracting more clients and growing our sales volume.

Margin, on the other hand, shows how efficiently we manage costs and evaluate our production processes. If revenue grows but margins decline, it may indicate ineffective planning or production assessment. In such cases, we take steps to optimize processes or introduce new evaluation models.

Customer satisfaction helps us understand how well we perform and meet client expectations. A decrease in this metric may signal issues with product or service quality, or a mismatch between client expectations and our offerings. This can serve as a warning sign that changes are needed in our processes or client interactions.

It's worth noting that these metrics are interconnected. For instance, if our goal is to increase the number of new clients, but attracting each client increases the cost of the transaction, this can negatively impact margins. Hence, we also track metrics related to customer acquisition costs and return on marketing investments.

Together, these metrics provide us with an objective view of our business status and enable us to make necessary adjustments to reach our goals.

Narrow metrics
in different niches

In various business sectors, unique metrics exist to help evaluate process efficiency. Let's examine some examples of such metrics:

1. Pharmacy Chain: "Time Spent Waiting at Checkout" Metric An increase in waiting times at checkout can indicate issues with staff productivity or cash register equipment. This can negatively affect customer satisfaction and repeat purchases. Analyzing this metric helps identify and promptly resolve problems.

2. Beauty Salon: "Workstation Occupancy" Metric This metric enables the salon to assess the efficiency of workspace utilization. Low occupancy rates may suggest suboptimal scheduling for stylists or marketing challenges. Improving this metric can boost revenue and enhance overall salon operations.

3. Auto Service Center: "Average Car Repair Time" Metric If the average repair time increases, it may point to issues with equipment, a shortage of skilled technicians, or inefficient work processes. Monitoring this metric assists in identifying bottlenecks and improving service quality.

4. Fitness Club: "Group Class Attendance" Metric Low attendance at group classes may indicate uninteresting activities for members or inconvenient schedules. Examining this metric aids in identifying popular classes and optimizing schedules, thereby increasing member satisfaction and income from group sessions.

5. Travel Agency: "Offer-to-Sale Conversion Rate" Metric This metric reflects the agency's success in converting offers into actual sales. A low conversion rate may indicate poor-quality proposals or inadequate client engagement. Efforts to improve this metric will lead to increased sales and customer satisfaction.

These examples illustrate how diverse metrics can be applied in different businesses and how they relate to various aspects of a company's operations.

Using metrics to improve processes

It's important to note that setting metrics is only the first step. What's crucial is using the collected data to continuously improve your processes. If you notice that a particular metric is deteriorating, it's essential to find the cause and adjust the process accordingly. Analyzing metrics helps identify bottlenecks and optimize company operations, leading to enhanced efficiency and achievement of set goals.

Conclusion

Setting and tracking process metrics is key to successful business management. It gives you a clear understanding of what's going on in your business and enables you to make informed decisions. Don't hesitate to experiment with different metrics and methods of tracking them to find the most effective ones for your business.

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