Like it or not, the world of business revolves around numbers. Profit and loss margins, return on investment calculations, staffing requirements – they all require metrics to analyse the health of your business.
The problem with metrics – also known as Key Performance Indicators (KPIs) – is that there are so many of them. If you set out to capture too many, you run a big risk of overloading and distracting yourself. Tracking too many metrics can be just as damaging as tracking none.
You need to identify the few KPIs (or even just one) that have the biggest impact on your business right now. Once you understand the ones indicating the health of your business, you can more easily see what is going right, and know how and when things go awry.
In the book Lean Analytics, authors Alistair Croll and Benjamin Yoskovitz break businesses down into five stages. Businesses start at Empathy and the best eventually progress through all five. By determining the phase of your business, you’ll not only be able to better understand which KPIs are most significant, but also have clarity into how to best spend your time helping your business to thrive. According to the authors, the five stages of business are:
Sometimes it’s clear what as to the stage of your business – other times less so. Your business could be in-between stages. Or one aspect of your business is at a different point than another. By examining your business through these distinct phases, you’ll have greater insight as to what requires more of your attention.
It’s also possible that you encounter a setback that sends your business backward to a lower stage. If this happens, you should understand how and why your business was affected – can you future-proof this problem going forward?
According to the authors, the first stage all businesses should go through is empathy. At the heart of the empathy in this context, is being aware of the best way to meet the needs of your customers. A successful business is dependent on satisfied customers – making sure you meet and exceed their expectations.
The authors recommend spending as much time with your current and potential customers as you can, to learn about their wants and needs. In addition to speaking with your regulars directly, you could run surveys via email or social media to get a better appreciation of what potential clients are looking for. By understanding their requirements, you’ll be able to optimise your service, and maximise their satisfaction with your business.
Businesses that have been around for years could still be at Empathy if they are not truly meeting the needs of their customers.
Being more of an art than science, it is often difficult to measure the business’ level of empathy. Instead of hard numbers, you’ll have to rely on your instincts to understand if your offering is truly resonating with your customers.
“Stickiness” refers to how often users return – how sticky a website or product is. For a brick-and-mortar business, this refers to how often customers come back to you.
By exceeding your customers’ expectations in the first stage, you have set yourself up for a “sticky” business that continues to the next phase.
The metrics you record should reflect the fact you are attempting to build a base of return customers. If you are a restaurant or coffee shop, you can measure how often your customers return. In retail – how many people are completing more than one purchase?
Once you have happy and returning customers, the next stage is to create virality. You might have heard the term “going viral” when it comes to internet memes, or videos that amass millions of views.
At the heart of the virality stage is the simple concept of word-of-mouth advertising. Long before the internet, business leaders understood the value of a personal referral.
Potential customers are much more likely to try your product or service if it’s been recommended by someone they know. Not only will people who hear about your service be more apt to give you a try, but it costs your business nothing! Rather than spending money on advertising that may or may not work, you’ll seek to maximise referrals from current customers.
With that in mind, the goal of businesses is to find ways for current customers to bring in new ones organically.
One way to increase the number of referrals is to offer current customers a discount for any new business they bring in. It’s important though, to actually measure the impact – if you offered this as a promotion – how successful was it?
Venture Capitalist David Skok coined the term “viral coefficient” that provides a simple way to measure the success of viral growth campaigns, which he explains further in his article Lessons Learned – Viral Marketing.
It might seem like Revenue should be the first stage. After all, a business needs to be making money to stay afloat.
However, spending time maximising revenue before mastering customer satisfaction, return customers and referrals, could affect your ability to grow a sustainable business. But once you’ve mastered empathy, stickiness, and virality, it’s time to dig down and find out how to maximise your revenue.
- Are you paying your vendors too much?
- Could you stand to raise your prices?
- Is there something additional you could offer customers they would be willing to pay for?
The revenue stage is all about making your business as profitable as it can be, without sacrificing the success you’ve enjoyed in working through the other steps.
The obvious metric to track is the dollar value of revenue. However, this is not necessarily best – the authors suggest tracking revenue per customer instead. Your revenue might be going up, but if you are making less and less per customer, it could be an indicator that your growth isn’t sustainable.
This is the holy grail for business owners. At this stage, you have a business that is meeting the needs of its customers, gaining new customers at a sustainable rate, and being profitable. Now it’s time to replicate that success by scaling it.
If you have a brick-and-mortar location, this could mean opening a new location. Hiring more employees could help you serve more customers.
With Scale, the metrics you need to track became more complicated and diffuse – in the other stages, you could focus on the most important metric. When talking about scale, the focus is keeping the business running smoothly and growing as much as possible.
You need to have systems in place that will alert you to any issues ahead of time. As you continue to experiment with improving your business, whether it’s a new marketing campaign or an internal process, your KPIs should help you understand if they are helping your business grow sustainably.
The authors of Lean Analytics have spent years working with businesses large and small to help them succeed. By thinking through the different stages of business they’ve identified, you can get a much clearer picture of your business and better focus on what’s most important.
On the surface, it might seem like these only apply to start-up companies, but if you look closer, you’ll find plenty of insight that applies to your small business. You might never make it to Scale, but that doesn’t mean you can’t apply ideas from the different stages to better understand the fundamentals of your small business.
If you are interested in learning more about the business stages and how to measure success at each one, the concepts in this post were derived from the book Lean Analytics: Use Data to Build a Better Startup Faster by Alistair Croll and Benjamin Yoskovitz.