What does it mean to Master your Metrics?
The difference between business brilliance and bankruptcy is often determined by an entrepreneur’s ability to read and understand the metrics or key performance indicators of their business.
Many new business owners make the mistake of attempting to solve their business issues by trial and error. A much faster and more efficient solution is to measure the relevant information and make an informed decision.
Let us look at a few examples of this:
A business that is struggling to make a profit may think that it’s issue may be a lack of customers. While that may be true, there may be other underlying causes that are less obvious. These issues, when addressed could take your business to an entirely new level of success.
One example of this is knowing and understanding your individual product’s Profit Margin or Unit Contribution. This is the amount of profit you make when you sell one unit of that good or service.
Profit Margin on Product or Unit Contribution
Profit Margin on Product = Sale Price – All input costs of that product
If your unit contribution is too low, it doesn’t matter how many you sell you will still struggle to make a reasonable profit.
For example if your profit margin is 23c per unit. You would need to sell 434,782 of them to make $100,000.
If you were able to raise your profit to 90c per unit. You would only need to sell 111,111.
Alternatively if you sold the same 434,782 units you would instead make $391,303.80 in profit.
Your Profit Margin on Products are the literal building blocks of your business success. When did you last re-examine yours?
By planning and minimizing the various input costs or by increasing your sale price you can increase your Profit Margin to ensure that each unit sold is resulting in meaningful profit for your business.
Another example of an neglected metric is Customer Churn.
Customer churn is when clients shop with you once but don’t return. Customers may do this for a whole host of reasons, but the result is the same. An expensive and perpetual cycle of trying to acquire new customers and when that customer doesn’t return you then remain in a vicious cycle of having spend your hard won profits to acquire your next customer instead of enjoying the profitability that returning customers will bring.
Understanding why many of your customers return and many do not, will soon help you gain an understanding of whether or not this is an issue in your business. If you have run into a wall when it comes to reducing your Cost of Customer Acquisition perhaps you could gain a greater benefit by improving your processes to ensure that more of your existing customers return to shop with you again, and again, and again.
Increasing the lifetime value of each customer can prove far more effective than simply lowering your Cost of Customer Acquisition a few percentage points.
There are just two examples of how Mastering Your Metrics can solve crucial problems that your business may face.
The next time you’re facing an issue in your business, take a few moments to search for metrics you might the able to use to make a more informed decision.
Using your metrics to guide your decision making is a key indicator of long term success for entrepreneurs.
If you would like some assistance with Mastering Your Metrics and maximizing your profits, take a look at our free premium training below. It will take you through the basics of Mastering your Metrics and help you take your business to the next level today.