What are the main KPIs to monitor and grow an online business?
Insights from Icarus Media Digital
At Icarus Media Digital, we support entrepreneurs to grow and scale online businesses. Part of our success comes from establishing the core key performance indicators (KPIs) that these businesses track to optimise their profitability and growth over time.
This article will share some of the main KPIs we recommend that online businesses establish and track as they grow to ensure they stay on track with business targets.
Selecting the most appropriate KPIs
It’s never been easier to gather data points on your business. However, when it comes to KPIs, less is often more. Success comes from narrowing your focus to the KPIs that give you the most accurate picture of the health of your business and how well it’s progressing toward its goals.
Marketing and Sales Performance KPIs
Conversion Rate (CR)
Your conversion rate gives you the percentage of a particular group of people who take a specific action that you desire, for example, the number of people who purchase your product in response to a particular email or social media post.
The formula to calculate CR is:
CR (%) = [number of conversions (sales/bookings etc.) / total number of users who received the invite to action (e.g. the number of people on the email list or the visitors to the specific web page)] x 100
In the early stages of a new online business, it is valuable to closely monitor the conversion rate of every new action you want users to take. Through this approach, you quickly learn what converts best and where to invest time and money.
Customer Acquisition Cost (CAC)
Your customer acquisition cost is the total cost of bringing a paying client into your business.
CAC = (cost of sales + cost of marketing) / number of customers onboarded
The costs of sales and marketing to consider in this equation include:
● People costs related to the sales and marketing processes
● Advertising spend
● Marketing creative fees
● Physical costs of producing content, e.g. filming equipment
● Marketing and sales technology costs (CRM, social media tools, reporting tools)
Some online businesses want to make an immediate profit on the CAC, whereas others focus on becoming profitable over time through monthly recurring income or upsells.
Return on Ad Spend (ROAS)
Your return on ad spend shows how effective your advertising is as a revenue driver. You can calculate ROAS for a digital marketing campaign with this simple formula:
ROAS = revenue generated by the ad / cost of the ad
In some cases, an online business will be happy to break even or lose money on the ad spend if they are confident in a high customer lifetime value. In businesses with a one-off sales model, it’s essential to maximise the ROAS.
Average Revenue Per Customer/User (ARPC/ARPU) and ARPPU
As the name describes, average revenue per customer or user is simply the revenue an individual client brings into your business on average. It’s a powerful metric for tracking the impact of price changes.
APRC = total revenue during a specific period (e.g. monthly) / average number of customers in that period
In businesses with a mix of paying and non-paying clients, perhaps due to having some free access to a product or service, average revenue per paying user (ARPPU) is a helpful additional KPI.
Monthly Recurring Revenue (MRR)
Monthly recurring revenue is a great KPI to track for any business with a membership or subscription model attached to it. For example, many business tools have a monthly fee attached. Some coaching programmes charge a monthly fee for access to specific information or group coaching.
MRR = the total revenue from monthly subscription fees
Customer Retention Rate (CRR)
An ambitious online business will typically want to retain customers or users and acquire additional ones. Your customer retention rate shows how successful your business is at keeping your user base.
CRR = [customers or users at the end of a period — new ones acquired] / customers at the start of the period
Customer Lifetime Value (CLTV)
Your customer lifetime value indicates the total revenue you can expect from each paying user or client you onboard during their relationship with the business. Upselling and reducing customer churn are strategies that enhance this measure over time.
CLTV = customer/user value (CV) x average customer lifespan (ACL)
With the formula components calculated as:
CV = average purchase value x average frequency of purchase
ACL = total customer lifespans / number of customers
Net Profit Margin (NPM)
It’s critical to keep an eye on the profitability of your online business as you grow. Increasing revenue can easily get lost in spiralling costs. Net profit margin is an effective KPI to ensure that increased revenue results in increased profits.
NPM = (revenue — expenses) / revenue
If your online business model has high set-up costs, it may take time to have a positive net profit margin.
Quick Ratio (QR)
Many profitable businesses fail due to running out of money by not managing their cash flow. The quick ratio shows how easy it is for the business to cover the money it owes through assets that are easy to convert into cash. You can calculate the quick ratio as follows:
QR = (cash and cash equivalents + marketable securities + accountables receivable) / current liabilities
● Marketable securities are assets that your business can convert to cash within a year. For example, if the business invests in bonds or stocks.
● Accounts receivable is the money due to the business from clients from products or services delivered but not yet paid for.
● Current liabilities are the money your business owes due now or within the period you are calculating (typically due within one year or a specific operating cycle); for example, debt repayments and taxes.
A quick ratio of 1 and above is considered healthy because the business has the resources to pay its liabilities.
Conclusion: maximise success with KPIs
Establishing and tracking KPIs is an excellent step towards growing your online business. To maximise your success, we recommend assigning ownership for your KPIs. In this model, a designated person has accountability for the performance driving each KPI, even if the KPI ultimately represents the performance of a team of people. Some businesses link remuneration to their KPIs to ensure alignment between employees and business goals.
Also, consider the reporting cadence that makes sense for your business. In the early stages, this could be weekly, and then over time, you may decide to move some KPIs to monthly or even quarterly as the business becomes more established and stable.
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