What is a KPI?
People rarely doubt the necessity of a dashboard in a car. One glance at it, and you know how much gas you have, what speed you are driving at, and engine’s oil level. As a driver, you can never ignore the indicators on your car’s dashboard, because the info they provide is vital for safe and comfortable driving.
Surprisingly, when it comes to KPIs in business, many people tend to think it’s some trendy techie concept invented for startups from Silicon Valley. “I don’t need any of this newfangled stuff to run my agency,” a seasoned entrepreneur might think.
And would be wrong.
KPIs are crucial for knowing your business’ state of affairs. Treat them as your car’s speedometer, or the oil level sensor, or whatnot. If you ignore KPIs for a while, you will miss the moment when you “run out of gas,” you won’t be able to react and adapt, and thus your agency will go down.
All the essential KPI’s can be divided into three major groups:
- Customer Acquisition Metrics
- Customer Success KPIs
- Financial Indicators
Let’s take a closer look at each of the categories.
These are the indicators you must pay attention to when looking for new clients. With their help, you can evaluate the efficiency of your customer acquisition strategy.
Currently, digital agencies mostly rely on the three most popular strategies:
- Referrals (people learn about a product or service from other people)
- Cold reach (brand representatives contact people who never expressed interest in a product or brand before)
- Content marketing (creating and distributing content that evokes interest in a product or service, but does not promote it directly).
Even though the efficiency of each of these strategies is harder to evaluate compared to paid traffic, it is still possible with the help of the metrics described below.
This is as straightforward as it looks: the amount of money or other resources you spend on customer acquisition: advertising, content creation, salaries, etc. Even the time spent can count as a part of the budget.
There are two ways to calculate this metric:
- By the end of every month
- Upon finishing a campaign.
When you have just started your business, and it is relatively small, calculate the budget you spend monthly. Just make sure you count the resources separately for each of the channels so that you could compare the results and see which of them works best for you.
This is the ratio between how many emails you send, and how many of them your potential customers have actually opened.
A formula would look like this:
Ideally, you want your open rate within 25%. Among the factors positively influencing this proportion are:
- A tested and optimized letter subject
- Personal touch (meaning that you write to your customers as a person, not just as a brand representative)
- Precise timing (depending on industry and target audience, the best time for sending emails may differ)
- The wording that does not look like spam
- Credible sender name
- Emails optimized for mobile gadgets.
The abbreviature stands for the “click-through rate.” Think of it as an indicator of how good your content/message/email/banner is.
CTR is determined by the ratio between the number of people you reached with your content/email, and the number of those who followed the link to your web page.
CVR stands for “Conversion Rate,” and determines the number of your page visitors, who performed a specific action after reviewing it: placed an order, scheduled a call, wrote a letter to tech support, etc.
CVR indicates how effective your landing page is, and is known to correlate with CTR: higher CTR result in higher CVR.
The lead-to-purchase ratio shows how many of your leads (prospective clients) become your actual customers. A well-organized sales process results in higher lead-to-purchase rates.
Usually, sales flow includes the following stages:
- Prospecting (searching for new potential customers)
- Contacting leads to gather initial information about their needs and “pains”
- Researching and assessing the needs potential customers have
- Demonstrating and educating the lead about the product/service, based on the information obtained throughout the previous steps
- Closing the deal.
CAC means “customer acquisition costs,” and stands for time, money, and other resources you need to spend to persuade a customer to purchase your product or service.
Knowing your CAC is essential because it is used to calculate the profitability of your business: if your customers bring you less money than you spent on their acquisition, you are in trouble.
Calculating CAC is simple: you must divide your marketing expenses on the number of customers you attracted during the period, within which the money was spent. The equation looks like this:
ROI, or “Return on Investment” metric is used to evaluate the effectiveness of investments you made. This is a versatile measurement that can be used as a universal gauge for assessing the profitability of an investment.
To calculate your ROI, you need to divide the net return of your investment by the total cost of the investment. Net return is the difference between the final and the initial values of an investment: budget, costs, expenses, etc.
The results of this equation are displayed in percent. Generally, you want it to be more than 100% – this would mean that your investments were profitable. ROI equaling 100% shows that you made or lost no money. ROI less than 100% should make you worried: your investment does not pay off, and you are losing your money.
The formula for calculating ROI looks like this:
Let us say John spent $20,000 throughout a month to attract new leads. On the next month, John gained $100,000 from these leads. He calculated the ROI of his customer acquisition strategy using the formula above:
ROI of 400% shows that John’s customer acquisition strategy was more than successful. Remember that you should ground your expectations on your business’ historical performance.
Customer Success KPIs
Customer success KPIs indicate how helpful your content or service is to your clients. In other words, these KPIs show whether a customer was able to achieve success (solve their problem) with your help.
This index shows the time a customer stays loyal to your product or service. You can calculate the average lifetime clients stay with your agency using the churn rate (or, the loss rate of customers) in percent. The multiplicity of 100 to this number will equal the average lifetime in years.
For example, if your agency’s churn rate is 25%, your lifetime will equal 100 / 25% = 4 years.
LTV stands for “lifetime value,” indicating the profit your agency will gain during the relationship with the client. Knowing your LTV is vital for assessing the financial value of each of your clients, and predict future customer acquisition expenses to meet your target ROI.
You can calculate your LTV using the following formula:
Retention rate is the percentage of old customers who continue to use your services throughout a period of time.
A discount rate shows the amount of money you anticipate to have in the future, based on how much money you have today. For example, if you lend someone $1,000 with 5% annual interest in 2019, in 2020 that person would have to return you $1,050. Which means that your $1,000 today are equivalent to $1,050 in a year.
Expansion revenue is the additional revenue that you can gain from the customers you already work with.
Expansion revenue can be acquired in many ways. Among the most typical ones is offering premium services to dedicated, loyal customers.
Let’s imagine a company selling a subscription for proofreading software. Initially, it would attract customers interested in core features such as spellchecking, punctuation, syntax, etc.
But as the customers would become fond of the program and are ready to pay for more advanced features, the company can start selling premium subscriptions that include additional services such as Google Drive integration, plagiarism checking, and so on. The revenues gained from selling new features to the old-time customers are called expansion revenues.
As a digital agency, you can also sell additional features to the old-timers. For example, if you are running an SEO campaign for a customer who has been loyal to your agency for a long time, you can offer them a package of additional services (link profile audit, broken link identification, etc.) for a heavily discounted price.
NPS or Net Promoters Score is a ratio used to assess the dedication and loyalty of your customers to your brand, product, or service.
The ratio can be calculated by asking your customers, “On a scale from 1 to 10, how likely are you to recommend us to other people?”
Customers who scored 9 and 10 are called “promoters” – people actively recommending your company to their friends, relatives, colleagues, etc. Customers scoring 7-8 are considered to be satisfied with your product or service, but not enough to recommend it to others. Everyone who scored below 7 is called “a detractor,” and is likely to advise other people against you.
A higher ratio between promoters and detractors results in quicker growth.
The KPIs listed below will help you estimate the overall condition of your business’ finance, and how much money it makes.
Although all of them are important, you should not prioritize them over Customer Success and Customer Acquisition metrics. All three groups are vital to your business and demand equal attention.
Gross/Net profit & margin
Gross profit is the profit left after deducting all the costs needed to produce and sell your products or services.
Gross profit margin is the percentage of revenue left from sales after all the costs of the goods sold (COGS) are deducted.
COGS include the value of materials used to produce services, distribution costs, salaries to the work and sales force, tools and software used in your agency, and so on.
The formula for calculating gross profit margin looks like this:
Gross profit margin shows you how well your business can sustain its operating expenses. Adequate, stable gross profit margin (the one not changing much throughout several periods of time) means that your business model is viable.
Net profit is what is left of your profit after all taxes and other costs are deduced from it. In other words, net profit is the bottom line, the actual amount of money you make.
Net profit margin is one of the most important KPIs for your business. It lets you predict future profits based on your revenues and is often used as an indicator of your company’s overall financial health.
Net profit margin is a ratio between your revenues and your net profits. To calculate it, you need to follow the formula:
Burn rate is the indicator of negative cash flow, and basically means how fast you spend your initial money reserve.
It is crucial for startups and small businesses to know their burn rate, because it shows how much time a company has before it runs out of money, and how much revenue it must gain to stay afloat.
Let’s say you’ve just started your enterprise, and your company makes $10000 a month, and your overall monthly expenses equal $20000. The amount of money you lose per month equal:
$10000 – $20000 = –$10000
If your venture capital is $50000 and you fail to gain more revenues, you will run out of money in 5 months.
Profit per customer
Profit per customer is a KPI showing how much money you can make from a single client throughout a certain period of time. It is the difference between revenues you gain from selling your products or services to a customer, and the costs needed to maintain relationships with this customer (advertising, discounts, etc).
Although it may seem that this KPI is similar to LTV (lifetime value), there is a crucial distinction. LTV is used to predict future profits, whereas profit per customer focuses on what already exists.
Revenue per employee
This KPI shows how much money each of the employees generates for your business. It is often used to compare the effectiveness of your company to other competitors within the industry.
To calculate the revenue-per-employee ratio, you need to divide your overall revenue by the number of people working for you:
One of the best ways to evaluate your company’s viability is to compare the key indicators of its productivity for a certain period of time. Usually, marketers use MoM, QoQ, and YoY time spans. (month-over-month, quarter-over-quarter, and year-over-year respectively).
Comparing different parameters within equal intervals will help you see the dynamics of your company’s growth. For example, if in 2017 your business made $100,000 in total and $135,000 in 2018, it means you grew by 35% in terms of profits.
Tracking the changes in your KPIs on MoM, QoQ, or YoY basis and visualizing them in graphs, you will notice patterns and fluctuations. Matching them with business strategies you used, or with external factors such as global economy tendencies, consumer trends, and so on, you will learn what works for your business or affects it, and what does not. This, in turn, will help you build more efficient business strategies, and grow your company even further.
Growth is an especially important parameter for digital agencies because rather often their workloads are inconsistent. Hence, it is not always clear whether hiring new workers would do good for an agency, or increase its burn rate and decrease revenue per employee.
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