What Are the 3 Most Important Small Business KPIs?

Sometimes, even data-driven digital marketing can be difficult. You do your best to measure as much as you can about each of your ads, only to get bogged down in a data jungle.

Consider two hypothetical ads you recently ran on social media:

  • One reached 50,000 users, had 120,000 impressions, and resulted in 1,500 clicks.
  • The other reached 30,000 users, had 100,000 impressions, and brought in 2,000 clicks.

Which outperformed the other? Does reach matter more than total ad impressions, and what about the clicks? Unless you prioritize your key performance indicators (KPIs), the answer can be difficult.

In fact, none of the above metrics actually tell you anything about how well each ad did in generating leads and customers. That's why it makes sense to know and understand the 3 most critical business KPIs.

Even if you already know that clicks matter and conversions matter more, you might not have thought of the below metrics. But in reality, they combine to give you the most complete picture possible in measuring the true success of your digital marketing.

3 Most Important Small Business KPIs

1. Cost Per Acquisition (CPA)

On average, how much does it cost to earn a new customer? That's the question CPA looks to answer.

Rather than simply looking at conversions or either total customers generated, CPA can help you understand the true cost of each new customer. You can even extend that metric to better understand the marketing click for each lead, click, and so on.

Why Does Cost Per Acquisition Matter?

Simple: It lets you know exactly how much you can afford to spend on a marketing initiative. In other words, as Social Media Explorer points out, it's the one true measure required to determine your return on investment (ROI). 

If you know your cost per acquisition, you can use other metrics (such as LTV, explained below) to determine whether a marketing tactic was actually successful. CPA gives you the central benchmark needed to determine whether a Facebook campaign, email initiative, or whitepaper was worth the investment.

How Do You Measure CPA?

Determining the CPA of an individual campaign requires reaching to other, relevant metrics. In the first ad mentioned in the introduction, you might have spent $4,500 on the campaign.

You know that 3 percent of your web visits typically result in conversions, meaning that 45 of your 1,500 clicks become leads. If 20% of your leads typically become customers, these 45 leads resulted in 18 customers. 

In short, you spent $2,000 to acquire approximately 18 new customers. Your CPA for this campaign is $4,500 / 18 = $250.

What Can CPA Tell Me About My Business?

Knowing your cost per acquisition allows you to understand exactly how much you tend to spend to acquire a customer. As a result, you can better plan (and even automate) your marketing efforts, avoiding wasteful spending by focusing on tactics and strategy that - in total - bring down your CPA.

2. Customer Lifetime Value (LTV)

Knowing your CPA in itself is powerful, but you can take that power to the next level by juxtaposing it to your LTV.

Your customer lifetime value is the other end of the cost-benefit equation. It tells you how much revenue you can expect from your average customer over the course of their relationship with you.

Why Does Customer Lifetime Value Matter?

For SaaS marketers, understanding their subscriber's lifetime value is a core part of building a sustainable business. But even for professional services firms with single rather than recurring revenue models, the same metric can be the difference in building a successful marketing (and business) strategy.

Above all, understanding LTV allows you to plan your budget. If you know how much revenue each customer will bring in, you can better allocate resources to make sure you break even or grow sustainably.

How Do You Measure LTV?

You can measure your LTV with a relatively simple formula:

LTV = (Average Transaction Value) * (Average Number of Transactions Per Customer)

If, for example, your typical client spends $5,000 each time they engage your service, and your clients typically engage your services 3 times during their relationship with your company, your LTV is $15,000.

Of course, the calculation becomes more complicated depending on your revenue model. If you charge monthly fees, you might consider a slightly more complex formula that accounts for this adjustments. 

What Can LTV Tell Me About My Business?

LTV might be the single most important KPI your business can track - in fact, Forbes.com has made that exact argument. That's because it allows you to learn about two crucial variables for your business:

  1. How much can you afford to spend on marketing? Juxtapose your LTV with your CPA, and you gain a much better understanding of the exact ROI of your marketing efforts.
  2. How successful are your retention efforts? Higher LTV means better customer retention, which is a vital part of business growth.

3. Time to ROI

In digital marketing, you don't just want to see results - you want to see results quickly. Unfortunately, especially in the professional services industry, that is not always possible. Law firms, for example, may go months until an interested member of their target audience feels the need to become a client.

To help you better understand how long it will take until your marketing investment sees a positive return, consider Time to ROI as your third essential business KPI. 

Why Does Time to ROI Matter?

It's easy to get impatient. If you embrace inbound marketing, but don't immediately see returns, it's tempting to turn toward more immediate measures such as paid PPC campaigns. But in reality, some of the most sustainably successful marketing strategies require time to develop and prosper.

Time to ROI can help you become more patient. It allows you to understand exactly how long it will take until a cost becomes a positive investment, allowing you to better plan your marketing strategy as a result.

How Do You Measure Time to ROI?

This metric depends not on a strict formula like the above, but a time estimate. The variables consist of the length of your campaign, the speed at which you can reach and adjust to your audience, and the average length of the buyer's journey within your industry.

For instance, your time to ROI will be faster if you can build an agile content marketing strategy that adjusts to audience preferences and market demands on the fly. At the same time, it will always be limited by the cycle through which potential clients in your industry go as they decide to engage a service like yours.

Through agile marketing efforts, you can reduce the time to ROI for real estate clients. At the same time, you will always be bound by buyers who can take months and even years to purchase a home. 

What Can Time to ROI Tell Me About My Business?

Time to ROI might be the most complex KPI to estimate, but it's also among the most effective. If your average time to positive return seems to be longer than it should, that might give you a clue about the length it takes to push out relevant content for your audience.

Even if you don't take specific efforts to improve your Time to ROI, simply knowing this metric can help in your planning efforts. Now, you know exactly how long an investment in a new campaign will take to pay off, and you can wait out the results more confidently knowing when to draw your marketing conclusions.

How to Start Measuring the 3 Most Critical Business KPIs Today

Ultimately, your goal as a business should be to lower your CPA, increase your LTV, and maintain or shorten your Time to ROI. If you can accomplish all three, you can build a more sustainable marketing and growth strategy designed to make the most out of even the most limited budget. 

None of these metrics requires expensive software or a math PhD to calculate. Theoretically, you can sit down with a spread sheet today, start estimating your LTV, CPA and Time to ROI, and improve your marketing planning and execution in the process.

You do, of course, need to have a good understanding of your customer and marketing data to get started. As mentioned above, measuring your CPA will depend on understanding conversion and yield rates, along with a variety of other, less important KPIs. 

The key to success, then, is a data-based approach to marketing designed to arrive at this point. If you can track and react to these three KPIs, you have reached the summit of data-driven marketing. Now, you can build sustainable marketing strategies almost guaranteed to bring a positive ROI, attract and retain more customers, and build your business.

Let's Talk About Tracking KPIs and Wasting Less Time