Increase in sales revenue and profitability are the two most common objectives for every business. Businesses measure month on month, quarter on quarter, year on year growth in sales. However, it is important to segment the growth data for actionable insights. How do you measure business growth? Do you look at the overall trend? Do you segment customers into groups and monitor trend for each group?
Businesses choose to focus on one or more of the revenue strategies illustrated below:
As you measure business growth, it is important to look at the 4 segments. Which strategy works best for your business? Do you need to spend more time acquiring new customers? Or is it a better bet to spend more time and resources selling to existing customers?
Strategic decisions could be misleading if combined growth is monitored without looking at each segment separately.
Metrics to measure business growth
Overall sales: measure the total sales for a given period. This is the total revenue from all segments, products and services. Monitor the trend and achievement in comparison to the sales forecast and goals.
Sales for each segment: As illustrated in Image 1, you could monitor sales for the 4 product groups. The trend for each group will give you insights for future strategies. In addition to these, you could create custom segments such as:
- Customers from different countries or cities
- Customers from different age groups
- Sources of acquiring new customers
- Homogeneous products or services could be grouped together to create segments
- Teams within your team could be treated as separate groups for comparing sales trends and performance
Customer Churn: What percentage of your customers stop buying from you or cancel their membership? This is a very important metric when you measure business growth. The rate of adding new customers should be greater than the customer churn. If not, your sales will drop consistently. Again, you need to measure the customer churn for each customer segment. One or more segments may have a higher churn compared to the others.
Life Time Value (LTV): LTV is the prediction of total revenue from a customer over the period of her association with your company. You could calculate this by multiplying the average purchase value by the average frequency of purchase by your customers per year. This figure when multiplied with the average customer lifespan gives you the life time value of a customer. It is a matter of concern if your LTV is lower or even marginally higher than the customer acquisition cost. A continuous increase in the LTV is a healthy indicator for future sales.
Profit Margin: This is a measure of your business efficiency. How efficient is your business in generating profit compared to the overall revenue. There are phases in a business life-cycle when they set lower net and gross margin goals. This is usually when they try to grow fast in a highly competitive market. However, if not monitored and controlled, it sets a wrong sales culture for the company. Have clear goals and targets. Review your pricing strategies to ensure profit margins are met as sales grows.
As explained earlier in the article, all these metrics are to be measured for each customer segment for actionable insights. As you observe the trend for each of these, check for special causes that may affect the growth. These could be external or internal. To control and improve these key measures of business growth, you must identify the input parameters. Here is a related post on determining the input measures for key metrics.
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