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 analyze the health of your business.
A simple web search or consultation with a business book will provide you with no shortage of metrics you could be tracking. Also referred to as Key Performance Indicators (KPIs) having the right metrics is vital to understanding what is going on with your business.
But the problem with metrics and KPIs is that there’s so many of them. If you set out to capture too many metrics, you run a big risk of overloading and distracting yourself. Tracking too many metrics can be just as damaging as tracking none.
Business leaders often struggle to understand what the most important metrics to the business are, and which can be placed on the back burner. What you need is to identify the few metrics (or one) that have the biggest impact on your business right now. Once you understand the few metrics that tell you how healthy your business is, you can more easily see what is going right and know when things are going awry.
The Five Stages of Business
In the book Lean Analytics, authors Alistair Croll and Benjamin Yoskovitz break businesses down into five stages. Businesses start at the first stage and the best eventually progress through all five. By understanding the stage of your business, you will not only be able to better understand what metrics are most important but will also get clarity into how to best spend your time to get your business to thrive. According to the authors, the five stages of business are:
An important point of understanding the stage of your business is that each stage has certain metrics that are the most important to successfully mastering that stage. By understanding what stage your business is in, you have much better insight into what is most important for you to measure and track.
Sometimes it is clear what stage a business is in, other times less so. Your business could be in-between stages. Or one aspect of your business is in a different stage than another. But by examining your businesses through these distinct phases, you’ll have greater insight into what’s currently most important for your business. It’s also possible that you encounter a setback that sends your business backward to a lower stage.
The Empathy Stage
According to the authors, the first stage all businesses should go through is the empathy stage. At the heart of the empathy stage is understanding the best way to meet the needs of your customers. A successful business depends on happy customers. The empathy stage is all about getting into the heads of your customers, to empathize with their needs and desires, so that your business can best meet them. The authors recommend spending as much time with your current and potential customers as you can to learn about what they want and need. In addition to speaking with customers directly, you could run surveys via email or social media to get a better understanding of the needs of potential customers. By understanding their needs, you’ll be able to serve them optimally.
Businesses that have been around for years could still be at the empathy stage if they are not truly meeting the needs of their customers.
Your goal at this stage is to understand how well you are meeting the needs of your customers, which is more art than science. As you don’t have many customers at this point, getting reliable metrics is a challenge. Instead of hard-numbers, you’ll have to rely on your instincts to understand if your offering is truly resonating with your customers. Conduct extensive interviews with them. Conduct surveys, do online research. Try to have honest conversations that allow your audience to be candid.
You won’t have clear cut metrics like profit margins to work with, so you’ll have to work extra-hard to be sure that you are filling a need.
The Stickiness Stage
On the web, “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. Of course, some businesses lend themselves better to return visitors than others.
By exceeding the needs of your customers, which you perfected in the empathy stage, you have set yourself up for a “sticky” business that sets up the next stage.
The metrics you track at this stage 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. How many customers are completing more than one purchase?
The Virality Stage
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.
While the concept is related, the goal of the virality stage is much more modest.
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’s also free! Rather than spending money on advertising that may or may not work, the virality stage seeks to maximize referrals from current customers.
With that in mind, the goal of businesses in the virality stage is to find ways for current customers to bring new ones in organically.
One way to increase the number of referrals is to offer current customers a discount for any new business they bring in.
At the viral stage, you want to measure how fast your customers are bringing in new customers. If you offered a promotion to encourage customers to bring in new ones, 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.
The Revenue Stage
It might seem like “revenue” should be the first stage. After all, a business needs to be making money to stay afloat. Of course, making money is a part of every stage.
However, spending time maximizing 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 maximize 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 stages.
The obvious metric to track at this stage is revenue, however, it might not be the best – the authors suggest tracking revenue per customer instead. Your revenue might be going up, but if you are making less and less per customers it could be an indicator that your growth isn’t sustainable.
The Scale Stage
This is the holy grail for business owners. At this stage you have a business that is meeting the needs of your 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. Or hiring more employees that can help you serve more customers.
At the scale stage, the metrics you need to track became more complicated and diffuse. Whereas in the other stages you could focus on the most important metric, at the scale stage the most important thing is keeping the business running smoothly and growing as much as possible. You need to have metrics that will alert you to any issues early. And as you continue to experiment with improving your business, whether its a new marketing campaign or internal process, the metrics you track 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 stages only apply to startup companies, but if you look closer you’ll find plenty of insight that applies to your small business. You might never make it to the scale stage, 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.