You also need to be sure that the money you’re spending on acquiring your new customers is paying off, that you’re landing the right types of customers, and that you are able to retain these clients and their business for the long term.
If you want to ensure that all of these areas of your venture are tracking well, and that your customer-service team is doing their job effectively, you need to measure results on a regular basis. After all, while you may think that you have a good idea of things, often the actual outcomes you see when you consistently analyze business data can show you the reality is quite different.
Taking the time and effort to check metrics can help you to pick up on problems sooner rather than later, and to find out potential areas of growth which can be exploited in the future. To gain an edge with analytics, read on for three of the most important metrics all businesses should be measuring today.
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Customer Retention Rates
One of the key metrics to focus on, no matter what industry your venture is in, is customer retention. After all, when clients are loyal to a company, they will purchase more often, in higher quantities or at increased values, and will also be much more likely to recommend a business to their friends, colleagues, family members and other contacts. This, in turn, helps to draw new customers to the venture, and can have a big impact on its finances.
If, though, you run a firm which has a high “churn rate” (that is, customer retention levels are very low and most clients only ever buy once and don’t return), you likely have a variety of issues within your venture which need to be addressed. These might include things such as product quality, service problems, shipping issues, and more.
It is very important then to always keep track of the retention rates your business has. To measure this metric, you can use a variety of methods. For starters, consider asking your clients for direct feedback at the time that they purchase from you, or else send out customer surveys on a regular basis to find out their thoughts.
Alternatively, analyze transactions to find out the percentage of customers who buy from you more than once, as well the average number of times a client spends money with your business, and what their average transaction amounts are. Regardless of the method(s) you try though, make sure you are always systematic about it if you want to get an accurate idea of this metric.
Lifetime Value of a Customer
Another one of the core things you should know about your business is the average lifetime value of your customers. This number is essentially a prediction of the net profit that you will receive over the course of your venture’s relationship with clients.
Working out this metric will make it easier to project how much repeat business you will likely receive over the years. In turn, this information will help you to:
• Know how much money you should spend on “buying” each new client
• Make key decisions about business elements such as customer service, marketing, sales. and product development
To work out what the likely lifetime value is in your business, you should take the average value of your sales (that is, how much, on average, customers spend in each transaction), and then multiply this value by the number of repeat transactions you get, and by the average amount of time that you retain a typical client.
As an example, let’s say you operate a membership-style business and your customers pay $10 for a product or service every month (so that’s 12 times every year). If you retain clients on average for two years, your lifetime value would be calculated as such: $10 x 12 x 2 = $240. The lifetime value of a customer is thereby $240, or, if you want to break it down in annual amounts, $120 per year.
Acquisition Cost Per Customer
Lastly, if you want to ensure that you’re not spending too much or too little on your marketing and sales expenses, you need to be measuring the acquisition cost per customer in your business — that is, the price you have to pay to land each of your new clients. This metric is commonly referred to as a CAC (customer acquisition cost) and will help you to understand what costs are involved in securing each new customer.
Knowing this information will help you to ensure that you’re not spending more on strategies such as advertising, events, search engine optimization and the like than each customer actually brings in to your business over the long term. However, do also keep in mind that the CAC does tend to go down as your venture grows and your brand name becomes more well-established in the market.
To determine your current customer acquisition cost, you should divide your total costs in this area over a set amount of time (say one month or one year) by the number of new customers you landed over this same period.