Measuring your business performance from the customer perspective is a must for any business, regardless of its size. It will pay small business owners to become intimately familiar with the Key Performance Indicators used to measure, monitor and provide the actionable insights needed to readily adapt your business to the changing demands of its customers whilst maintaining a growth trajectory.
Regardless of the industry you are in there are core set of metrics you need to apply to your business. The core customer metrics you need to become familiar with are:
* Market Share/Market Penetration
* Customer Acquisition
* Customer Retention
* Customer Satisfaction
* Customer Profitability
Market Share/Market Penetration
Market Share reflects the proportion of business in a given market (in terms of customer numbers, dollars spent, or unit volume sold) that a business sells. To measure this effectively, you need access to market research which identifies the size of the total market.
These market figures are usually available from your government statistician, industry bodies and trade associations. The government statistician provides high level research and is usually available for free. Industry groups and trade associations may charge non-members, while members may access the information for free, or at a reduced rate.
While these reports usually provide information about the Market Share of each of the competitors, it is usually limited to only those competitors that hold significant share in the market, while small businesses and start-ups are lumped together in a single measure. So until you reach critical mass and are rewarded with recognition in the market research papers, my suggestion is that you substitute the Market Share key performance indicator with the Market Penetration measure.
Market Penetration uses the your business’s customer numbers, dollars spent or units of volume sold and measures them against the total market figures to get some idea as to your performance in this area.
Measures, in absolute or relative terms, the rate at which a business unit attracts or wins new customers or business. Typically, if your business is on a grow path your objective will be to increase your customer base. Usually it is measured by either the number of new customers or the total sales to new customers. Measures could also be applied to each customer segment if you apply customer relationship management principles.
Another key measure that I suggest you apply in relation to measuring customer acquisition is the Acquisition Cost. This measures the performance of your marketing campaign in regards to the achieving the desired outcome – acquiring new customers.
Acquisition Cost is the number of new customers since the campaign started divided by the total marketing campaign cost.
The final measure to add is the Customer Conversion Rate, which measures the total number of leads generated divided by the number who actually made purchases, and expressed as a percentage.
Tracks, in absolute or relative terms, the rate at which a business retains or maintains ongoing relationships with its customers. Clearly, the best way for increasing market share is to start by retaining your existing customer base. Customer Retention is measured by measuring your existing customer base at the beginning of a given period divided by the number of lost customers during that period. It is sometimes difficult to identify when they are considered to be ‘lost’. I’d suggest that anyone who did not make a purchase for over a year, is a lost customer.
Customer retention and customer satisfaction are driven by meeting customer needs. A successful business will be looking to provide customers’ innovative products with an excellent value proposition. Research has shown high degrees of customer satisfaction correlate with achieving loyalty, retention and profitability. Today, with competitors only a mouse click away, your focus should be on generating ‘raving fans’ by providing them with exceptional customer experiences. This not only drives repeat custom but creates valuable word-of-mouth recommendations to their family and friends.
You need to derive a satisfaction measure based on direct feedback from your customers. This measure will differ for each business, but should assess each component of the buyer’s experience to garner actionable insights which will act to focus your attention and activities.
This measures the net profit of a customer after allowing for the unique expenses required to support that customer. A financial measure like customer profitability, keeps the business from becoming customer-obsessed. Companies should aim to have more than satisfied and happy customers – they should be aiming for profitable customers.
This helps the business to assess whether they should continue in a particular market or,due to the drain on the business, should choose to opt-out.
Implementing core customer metrics in your organisation can help you track your performance and provide the basis for effective, fact-based decision-making in your small business.