Four Metrics That Will Measure the Health of Your Business

As an executive at Pike13, I think about business performance metrics virtually all the time. I’m constantly looking at data and analysis to determine the health of our business, which as you know is providing business management software to service providers like you.

You may think, given that Pike13 is a technology company focused on developing and supporting software, that our business is very different from yours. Your business, after all is focused on improving the skills and or health of individuals through personal and classed-based services.   

However, the more I think about it, I see a great many similarities to our respective businesses. We both rely on repeat customers who pay for our services on a monthly or annual basis. Our customers often chose our business over others due to word of mouth recommendations from their friends and networks. The most valuable customers we have are those that continue to do business with us year over year.  And, perhaps the most important similarity is that you and Pike13 provide a service – whether it be through technology or personalized services – that aim to enhance the lives of our customers.

Given these similarities, I thought it might help to share some of the key metrics I use to evaluate our success. I think they are metrics that you can track for your business and become familiar with if you haven’t already.

We track many different metrics, but the four most critical are:

•      Monthly Recurring Revenue (MRR)
•      Churn
•      Lifetime value of customers
•      Customer satisfaction (NPS)

Let’s look at each of these in a little more detail:

Monthly Recurring Revenue (MRR) 

This is perhaps the most important metric you can track. MRR is the sum of all the paid subscriptions and other recurring revenue streams that your customers pay you. It excludes one-time fees. The reason MRR is so critical is that it provides a top-down snap shot of the revenue your business generates every month – and that you can expect to generate in future month (net of churn, which we will get to in a minute). The beauty of monthly recurring revenue is that once you obtain a customer, you can expect to continue generating this revenue month over month. It is much easier, and therefore much more profitable, to keep your recurring revenue customers than to incur the sales and marketing costs of obtaining a new customer. The trend you want to keep a close eye on, obviously, is the growth of MRR over time. Increasing MRR month over month not only means that your top line business is growing, but that you are adding/keeping more clients than you lose each month. 

Churn  

Churn is the other side of the MRR coin. It is the number of recurring clients that leave your business each month. You should track churn as the number of customers lost each month and compare to the number of new customers added each month, the MRR value of those lost customers (and indication of the revenue hit your business incurs from losing those customers), and the % of churned customers vs. total customers.

Lifetime Value of Customer  

The actual churn numbers are critical.  But churn also provides a very valuable insight as to the average value of customers over time.  This is called the Lifetime Value of Customers. To better understand this, let's look at an example:

If you are churning 5% of customers every month, that says on average you’ll turn-over your entire customer base in 20 months.

1/0.5 = 20

If the average MRR that an average customer pays you each month is $300 than the lifetime value of each customer is $6000.

($300/month) x (20 months) = $6000.

That says that, given your average membership price and the fact that, on average you keep each customer for 20 months before they leave, you can expect $6000 of total revenue from each new customer over their lifetime with your business. Knowing this number then allows you to make other decisions such as how much you want to pay in marketing and sales costs to acquire new customers. Clearly, if each customer is going to generate $6000 over their lifetime, you’ll want to spend far less than that to acquire them.

So now you can see that there are two huge levers to managing your business: how much revenue do I generate each month and how many customers do I lose each month. You can increase your business’ revenue by adding more customers or increasing prices and/or by reducing the churn rate to reduce the leaking of customers and their lifetime revenues.

Which brings us to the fourth key metric:

Customer Satisfaction

Obviously happy customers are essential to a thriving business. Satisfied customers are willing to pay for more services and are less likely to leave your business. You can evaluate customer satisfaction in many ways either anecdotally or through informal or formal customer surveys. A methodology we use at Pike13 is the Net Promoter Score (NPS). NPS is a number that results from asking your customers to classify themselves into one of three categories:

1. A Promoter of their experience with your business
2. A Detractor of your business
3. Ambivalence about your business (a neutral opinion of their experience; neither good or bad).  

Your business’ NPS score is simply the difference between the number of Promoters and the number of Detractors (the neutrals don’t factor into the score).  You obviously want to see a positive NPS score.  In our industry, NPS scores from +1 to +10 are ok, +10 to +40 are considered good, and +40 and above are excellent.

You can utilize online surveys to generate your NPS scores for you for a small monthly fee.  It is a very helpful way to take the pulse of your customer base.

There are many other metrics we use an evaluate regularly.  In future blogs, we will explore them as well as discuss how to use these metrics to plan your growth strategies for your business.

Pike13 tracks the metrics that help you measure and improve your business.

See Pike13 in action by requesting a free 20-minute demo. 

Featured Photo Credit: Pixabay