When looking to start a new business venture, begin a new job or just learn more about a new subject, coming across unfamiliar jargon can create a huge mental block and make an otherwise routine task seem completely impossible and overwhelming. Nick Swan, has put together a five-step guide to understand business metric terms so that no one has to struggle again.
What’s the difference between a business metric and a key performance indicator?
Though similar in many ways, key performance indicators (KPIs) are slightly different to business metrics. Generally speaking, a KPI is more specific than a business metric and is related to some sort of performance-orientated goal which is actively measured. All KPIs are business metrics, but the opposite is untrue.
Business metrics stretch across all categories of a business
Business metrics don’t just apply to one specific area like sales. Rather, they apply to sales, finances, marketing, workforce, product performance and more. There are also specific business metrics for different industries, for instance software as a software (SaaS) companies. For those operating in the SaaS space, metrics such as custom acquisition cost – dividing the total acquisition expense by the total new customers over a specific period – and customer loyalty and retention are more important than they might be for other businesses.
They don’t need to just be hard numbers
It might seem surprising that something as subjective as employee engagement can be a business metric too. Are employees emotionally invested in their role and the company as a whole? Are they satisfied? Are they collaborating with colleagues? These are all important metrics for any business with a sizable amount of employees. They can be measured through passively-collected data such as semi-regular surveys and are important to stay on top of, in order to maintain productivity and retain employees.
In marketing, search engine optimisation rules the roost
When it comes to marketing, conversion rate is vital and it can all be linked back – pun intended – to strong search engine optimisation (SEO). Performing well in key metrics such as keyword ranking (how well a website ranks on Google for a keyword) and domain authority (how highly Google ‘rates’ the authority of a website) will put a business in the best position possible to have a healthy conversion rate – the percentage of viewers who enact a company’s desired action, whether it’s purchasing an item, engaging with a feature or making a service commitment. Conversation rate is calculated by dividing the total number of viewers which enacted the desired action then multiplying the total by 100. This is imperative for marketing; engaging with consumers in the incorrect manner doesn’t help a business at all.
At the end of the day, the most important metrics are sales
Businesses exist to make money and cash is king. As such, the most important metric will always be sales, though it’s worth noting that there are many different sales metrics. How long is the sales cycle – the length of time it takes a customer to move from first initiating a purchase to fully completing a purchase? What’s the average selling price of a company’s product and what’s the average profit margin, found by dividing net income by net sales. The average profit margin differs from the net profit margin, which takes into account all expenses like interest and tax. The most important metrics are found in sales, but it’s not as simple as counting the number of products sold.
