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Cutting Through The Crap: Setting KPIs That Impact Your Business

Posted by Ross Lauder

What's the measure of success for your business?

The obvious answer is profit. It is the reason for-profit businesses are created, after all. However, profit is not the only thing you need to measure to have a successful business. Businesses that want to be successful need to measure as many of their activities and results as possible. They then have to use the results of those measurements to improve their process. It's true for production, just as it's true for marketing and sales.

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People measured the performance of sales and marketing activities well before the Internet was invented. But with the advent of the Internet, and then the search engines, and the social networks, and the multitude of tools that let you measure, calculate and analyse every part of your business's online activity, the interest in sales-and marketing-related measurements exploded. And now suddenly everywhere there seems to be this noise around KPIs. So, what really matters today?

First And Foremost, What Are KPIs?

KPI is short for key performance indicator.  It's exactly what its name suggests: a value that allows businesses to gauge the performance of their activities.

KPIs range from the very simple - measuring and calculate, like the number of likes you get for a Facebook post - to those that require complicated mathematical formulas.

Either way, KPIs are useful because they tell us something. And that something can help us evaluate the actions your business is taking. Most of the time, at least.

What Are Vanity KPIs?

Vanity KPIs are simple metrics that look good and can make you (and especially your investors and clients) feel good.

  • The number of Facebook followers is measured in thousands, and it tells you how big of an audience your page has on Facebook. The same goes for Twitter followers.
  • The number of LinkedIn connections tells you how good you are at using the largest professional networking platform on the Web.
  • Website traffic is the number of people who visited your website and blogs or landing page in a given time period.
  • The number of downloads is a number that shows you how many people downloaded your eBook, white paper, report, or survey results. If you’ve gated your download, i.e., asked for some basic contact details in exchange for value, then here’s where you start getting into the meat, as you’re actually measuring leads.

KPIs also exist in the offline world, and some of them are pure vanity too. The number of calls made is such a KPI, as is the number of events attended. While these are somewhat useful, they don’t directly impact revenue. They are what I refer to as ‘secondary metrics’ i.e., they are only referred to when revenue is down, or worse still, non-existent. Most organisations aren’t even set up to trace this correlation in the buyer journey.

What's the Problem with Vanity KPIs?

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The core problem with vanity KPIs is that they're not key to (almost) anything and that the performance they are used to measure isn't the performance you should be looking into.

Let's say that you're checking your closest competitor's Facebook page, and you notice they have twice as many followers as you. From that comparison, you can assume that their online marketing activities are twice as effective as yours, or that they have twice as many people who exit their sales funnel as customers.

But you know what they say: to assume makes an ass out of u and me.

In this case, you should assume nothing for one simple reason - the number of Facebook followers tells you exactly one thing about your competitor, and that thing is the number of Facebook followers they have. Nothing more.

It doesn't tell you how they got those followers. If you didn't know, Facebook followers can be bought. It doesn't tell you how many of those followers actually buy the products and services your competitor offers. It doesn't tell you how much money they are willing to spend on your competitor's products or services. It doesn't tell you how much money the competitor spent on getting those followers.

The information vanity KPIs provide is information on the surface. They don't tell you anything that's critical to the success of your business or that could explain the success of your competitors' business.

If you're convinced that these KPIs are the things that will make or break your business, you're at risk at investing too much time, money, and attention on chasing after them, while completely neglecting the KPIs that really matter. You can invest your time in attracting a million unique visitors to your website every month, but if only a handful of them make a purchase, your business will still have to close its doors.

So, Should You Stop Monitoring Your Website Traffic?

Vanity KPIs aren't completely useless. You can use them as a data point that, coupled with some other data points and some maths, can give you a KPI that's worth following.

Let's stick with website traffic. On its own, it tells you how many people have visited your website, which is nice, but not that valuable.

If you split the total website traffic into organic traffic and paid traffic, you can calculate the organic-to-paid ratio. This is a slightly more useful metric that allows you to see which type of marketing and advertising activities generate more traffic and should be focused on.

It gets even better. You can calculate the number of visitors from each source that converted, and see which type of customer has more value for you.

You can also then calculate how much each of the two types of visitors costs you, and compare that with the value they have. You might notice, for example, that organic traffic is twice as likely to convert, but three times more expensive than paid traffic. Obviously, there's a decision to be made here, but the important thing is that you have the data that helps you make that decision.

Business-Critical KPIs: The Sales and Marketing Metrics You Need to Watch

Even when you remove all the vanity KPIs, there's a whole forest of valuable KPIs you need to navigate your way to.

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Depending on your business, the goals you want to achieve, and the activities you monitor, you'll probably change the KPIs you follow to get the best possible picture of your current efforts.

But when it comes to marketing and sales, you'll need to make sure that you monitor the business-critical KPIs. These are the KPIs that measure the effectiveness and efficiency of your sales funnel, the value of your customers, and their disposition.

So, let's dive into these critical KPIs.

  1. Click-Through Rate

Whether you are using Ads or content to generate leads, you need to know what your click-through rate is. That is to say, what is the natural follow-on percentage of those who read a valuable piece of content or Ad offer and then decide to ‘Click-Through’ onto your landing page to ‘Learn More’ or ‘Download’ a resource in exchange for their contact information. They are in essence clicking your designated ‘Call-To-Action’ or CTA to become a more qualified lead who would engage in your product or service.

This represents the first step in what I consider the value exchange process. When you have an awareness of this, you can start to analyse the success of the breadcrumbs in your lead generation process.

This metric allows you determine what you are offering the world in terms of value, and how it is being received. Today people are jaded by pushy sales people (though we are far from the death of a salesman), and the only way to gain attention is by ‘paying it forward’ and offering massive value up-front. Thus, in the lead generation process, this provides feedback on the baseline quality of our offer to the world.

While the benchmark for this number varies across different industries, you’ll want to be converting at between 1-2%, with exceptional results being in the 5-7% range.

  1. Number of Leads Generated per Month

The most basic of the business-critical KPIs you need to monitor is the number of leads generated per month.

Tracking the leads you generate in a given amount of time is helpful in a couple of ways.

You can create a month-over-month comparison to determine whether your lead generation is growing or shrinking.

If you set a goal of leads generated for each month, you can compare the number of leads you actually generated to see how well your business operated that month.

Tracking your leads also gives you an opportunity to slice the number of leads generated per month in different ways. You can, for example, separate the number of leads per source, and determine which of your marketing channels is getting you the most.

Finally, measuring the number of leads you generate each month is useful because that number is used to calculate many other KPIs.

  1. Cost to Acquire each Lead

The cost to acquire each lead is a KPI that's easy to calculate.

calculating_cost_value_per_lead_as_KPI_to_measure_success_of_your_digital_marketing_strategy.gifYou calculate the costs of all your lead-generating activities and divide it by the number of leads these activities generated. So, if you spent $1,000 to generate 25 leads, the cost to acquire each lead is $40.

The average cost of lead varies depending on the industry, but the rule of thumb says that leads in finance and IT are the more expensive ones, while the leads in retail, education, and telecommunications tend to be less expensive. This also makes logical sense when you consider the spend pattern in these respective B2B versus B2C mediums because you will naturally be happy to pay more to acquire a lead that could potentially spend more with you.

The cost to acquire each lead will be a very valuable metric down the line when you get other KPIs that show you how many of your leads turn into customers, and how much value a customer has.

Before you get to that, however, you can slice the cost-to-acquire-lead KPI into segments as you would the number of leads generated in the month and gain some valuable insight.

For example, you can slice it by source or channel you used, and then divide that number by the number of leads you generated per source.

What you'll get is the cost per lead per channel.  You can use that information to see which channels are the most expensive ones - probably display and CRM marketing - and to see how much investing in those channels pays off.

For example, you can see that social media advertising is more expensive for lead generation than non-paid social media activities. And if it turns out that the non-paid activities are the ones that generate more leads, you can decide to focus on them.

  1. Margin Earnings Per Lead

This is an often overlooked, yet vital component in the bottom line measurement of success. Before we get to opportunity conversion, let’s first consider the success of each lead, that is, the value of a lead that we acquire.

If you have a product or service which nets your business a margin of $500 per sale, and it is converting at 2%, it means that for every 100 leads you’ve generated two people will become customers. We have now generated $1,000 in sales from 100 leads, meaning we have earned $10 for every lead.

To make this metric meaningful, we now need to ensure that our cost per lead is lower than the cost to acquire each lead, which translates into profit. Before you go any further with any level of content or an Ad campaign, know these numbers and live by them!

  1. Conversion Rate from Lead to Opportunity

If you take the number of leads you can qualify as opportunities, divide it by the total number of leads, and multiply that by one hundred, you get the conversion rate from lead to opportunity. So, if you had 60 opportunities from 180 leads, you have a conversion rate of 33.33%.

This sounds simple enough, and it can be. As long as you know what an opportunity is.

Let's say that through a landing page you got the email address of a person who works in a company that operates in the industry for which your business offers software solutions. That's a lead.

For that lead to become an opportunity, you need to determine whether that company fits the profile of your buyer (whether it's the right size, for example). You also need to determine whether they need the type of product or service you sell and if they are able to afford it. You'd want to know whether your contact is the person who will make the purchase decision, or at least can get you in touch with the decision maker. And finally, you need to find out whether they'd be interested in purchasing from you.

The conversion rate from lead to opportunity explains the percentage of your total leads that match the criteria you set for an opportunity.

You can use the conversion rate in two ways.

You can use it to determine the quality of your leads. If your conversion rate is consistently low, it might be the fault of bad demographic targeting, for example. You can also use it to determine the efficiency of all the processes that take place between acquiring a lead and converting it into an opportunity.

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  1. Close Rate from Opportunity to Customer

Just as the conversion rate tells you how many leads turn into opportunities, the close rate tells you how many opportunities actually complete a purchase and become a customer.

You get that number by dividing the number of customers by the number of opportunities you had and multiply it by 100. If you had seven customers from 35 opportunities, your close rate is 20%.

Together with lead generation and conversion rate, the close rate measures the effectiveness of the stages of your sales funnel. A low close rate indicates that your sales process isn't efficient at actually selling things to people who would be willing to buy them, or that you need to think about what you call an opportunity.

  1. Average Value of each Customer

The average value of each customer is a KPI that shows the immediate effects of your sales funnel.

If you take the entire revenue you get from your customers as soon as they leave the funnel and divide that by the number of customers, you get the average value of a customer. So, if you have $10,000 of revenue from 25 customers, the average value of a customer is $400.

In some cases, you can also calculate the value of each customer over a given time period. This can be helpful when calculating the lifetime value of each customer.

  1. Lifetime Value of each Customer

The lifetime value of each customer is a number that represents the value of a customer during the lifespan of your customer relationship. There are a couple of ways to calculate it.

You will need the average lifespan of your customers - not the number of years they live on average, but how long they stay as customers of your business. That number is represented as units of time.

Calculate the average value of each customer for that unit of time, and then multiply it by the number of units that represent the lifespan. So, if your average value of a customer is 30$ per week, and the average lifespan is 104 weeks (two years), the lifetime value of your customer will be $3,120.

Want a more sophisticated calculation? Here's how it looks:

LTV= the gross average lifetime margin per customer x (retention rate / (1 + discount rate - retention rate)).

The lifetime value of each customer can help you determine the health of your business in the longer run.

It can also be very valuable when determining how much money you want to allocate to customer acquisition, and if you slice it by different demographics, it can help you better target your marketing and sales efforts.

In my next blog, I will look at another important metric you need to measure: customer satisfaction. Check back to find out how the CSAT score and NPS can reveal how happy customers or clients are with the products or services you provide, and how likely they are to recommend you to others.

For now, find out how we can help you create, measure and perfect your digital marketing strategy to increase your lead conversion and sales rate by arranging a call with me. 

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Author:

Ross Lauder

Ross Lauder

Senior IT Sales Leader with extensive knowledge of sales, marketing, people management, process improvement, cross-cultural/ cross-functional management and customer experience.


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