The Most Important Metrics your Start-up Should be Tracking

Not all metrics are equally valuable. The really good ones will tell you about the things that matter to your business. They will tell you about the results of your marketing efforts. They will help you diagnose issues and create a clear plan to deal with them. The ones that don’t do that are called “vanity metrics,” and they can be hazardous for businesses of any size.

What Are Vanity Metrics?

Vanity metrics are the type of metrics that do very little besides making you feel good. On their own, they won’t give you any actionable insights, or any insights at all. They are just numbers that look good to people who don’t know what numbers they should be looking at.

Let’s look at an example. You have a Facebook page, and 10,000 people following it. What does that number tell you? Does it tell you that you have 10,000 customers following you on Facebook?

It doesn’t. Does it tell you how willing your audience is to engage with your content?

Nope. Does it tell you how well you are targeting your audience? No. It doesn’t even accurately describe your social media reach.

It just tells you that there are a lot of people following you, and they may or may not see what you post on Facebook. That’s it.

Website traffic is another vanity metric. On its own, the number shows you only how many people visited your website. It doesn’t tell you where they came from, it doesn’t tell you what causes an increase or a decrease in visits, and it doesn’t tell you what they did once they came to your website. It just tells you they were there.

Moving From Vanity to Actionable Metrics

Vanity metrics can seduce you by showing you large numbers that look good in a chart but only provide surface information. Does this make them completely useless? Not really.

Vanity metrics can be used as key performance indicators. Any metric can — all you need to do is marry the metric with a business goal and perform some actions to achieve it. And that’s where vanity metrics become really hazardous. If you set chasing after them as your goal, you will spend time and resources on something that either has no effect on your business or has an effect that you don’t completely understand.

But vanity metrics become valuable if you know how to use them to derive important KPIs. Let’s say you spent a certain amount of money on a campaign to drive traffic to your website.

You spread that money across a couple of segments — social media, ads, and activities that should increase organic traffic. After a month, you see that your website traffic has increased. Goal achieved, and all is well. Right?

Wrong. The only thing you’ve learned is that spending money to increase website traffic works. But if you take that traffic increase and divide it by channel, you can see how many people arrived from social media, how many from the ads, and how many from organic search.

If you take the money you spent on each of those activities and divide it by the increase in visitors per channel, you get the cost per visitor per channel. And now you’re on the road towards thinking about actionable metrics.

The Metrics That Matter

Determining which marketing channel gives you the most visitors is important. But it’s even more important to know how many of those visitors convert into leads. You can spend $1 to get 100 visitors using one channel, and $10 to get the same number of visitors on another.

If you convert only one out of every 1000 of the cheaper visitors into a lead, that gives you a price per lead of $10. If you convert one out of 10 of the more expensive visitors into a lead, you pay $1 per lead. So which marketing channel is more effective?

If you’re a small or medium business owner who uses the Internet to sell products or services, visitors and followers won’t matter to you as much as leads and conversion rates. The metrics that matter to you are those that describe the efficiency of lead-generation, and the process that guides the leads towards becoming opportunities and customers.

Calculating Conversion Rates

Let’s take a look at a simple sales funnel and the metrics that are needed to analyze it. At the top of the funnel, you have prospects — the people who visit your website. In order for them to become leads, prospects usually have to perform an action, like filling out a form or clicking on a call to action button. This is where you calculate your first important metric:

  • Conversion rate (in percentages= number of leads / number of visitors * 100

As the prospects progress further down the funnel, each stage can have its own conversion rate calculated using the same formula – the number of people who pass the stage is divided by the number who entered it, and the result is multiplied by 100 to get the percentage. This can be done when converting leads to opportunities, and again opportunities to customers.

You can also skip the steps in the funnel and simply calculate the conversion rate from lead to customer.

Calculating Costs and Values

The efficiency of your sales funnel isn’t the only thing you should be monitoring and calculating. You also need to be aware of how much it costs to acquire a lead (and subsequently, a customer), and how much a customer is worth to you.

Calculating the cost per lead is easy enough, as we already discussed:

  • Cost per lead = the cost of all lead-generating activities in a period of time / number of leads generated during the same period.

You can use the same formula to determine the cost of acquiring a customer, simply by substituting the number of leads by the number of customers.

The value of your customers can be assessed in a couple of ways. The simplest, the customer value, measures how much a customer is worth during a period of time:

  • Customer value = average order value * purchase frequency in that period of time.

If you want a more long-term look at the value of your customers, you need to calculate the lifetime customer value. The simplest way to do it is:

  • Lifetime customer value = customer value * customer lifespan.

Customer lifespan refers to the amount of time a customer will remain a patron of your business, and it should be expressed in the same unit you used to measure the purchase frequency. It’s not an easy metric to calculate, especially for new businesses, and the rule of thumbs is to set the customer lifespan for three years (or 36 months, or 156 weeks) if there’s no data that’s more accurate.

There are far more accurate ways to calculate lifetime customer value, as detailed in this great article from Kissmetrics.

The metrics that are really important are metrics you can use to tell how healthy is your business, and how the actions you take to grow your business affect your bottom line. Usually, picking up to five metrics to track will cover this, with additional metrics added for specific actions and during marketing campaigns.

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