An organization can make unprecedented growth and progress, or lack overall business health. But regardless of whether the organization is performing well or not, they are not run on perception alone. They are run based on insights derived from the analysis of vast amounts of data collected by tracking and measuring the various parameters that indicate the performance and health of the organization.
You need proof of your growth, success, or failure when you run an organization. Only when you measure various parameters that help you build a big picture of where you stand and how you fare can you identify your priorities and areas you need to focus on. Your action plans depend on that, too. To measure these parameters methodically, you need metrics.
What are metrics in business?
Metrics are the units of measurement that you need to measure the overall business health of your organization. A metric is usually a standalone unit of measurement that does not denote a complete picture or an aspect of an organization’s performance.
In simple terms, the metrics are akin to an assortment of raw materials lying within a manufacturing facility that makes different products. To make a product, you need to use suitable raw materials in the correct proportion using the right processes. A raw material itself can never be a functional finished product. It is only useful as an ingredient, just like a metric. A metric is a single statistic that does not give any meaningful insight. It needs to be compared with other parameters and combined with relevant business metrics to build any meaningful understanding or interpretation. All metrics or not created equal, and the significance of each may vary for every business. You can choose the metrics that are relevant to your business.
Types of Metrics
Following are the different types of metrics used in business to measure various parameters.
- Goal metrics
- Quantitative metrics
- Qualitative metrics
- Actionable metrics
- Vanity metrics
- Informational metrics
- Key metrics
1. Goals Metrics
Goal metrics, as the name suggests, are used to measure the organization’s performance, goals, and strategy. They help you to constantly evaluate your goals and strategy and optimize the process of goal setting and strategic management. Goal metrics define how a goal will be measured. For instance, the performance of an email marketing campaign can be measured using the goal metrics of click-through rate. There are two types of goal metrics.
a) Amount metric: The amount metric is usually a monetary value, either in the form of an integer or decimal value.
b) Count metric: The count metric is the number of units, usually an integer.
2. Quantitative metrics
Quantitative metrics are numerically measured and are usually calculated using a specific formula. They can be financial metrics such as revenue or Gross profit or non-financial metrics such as organic traffic to the website or the number of units sold.
3. Qualitative metrics
Qualitative metrics are the metrics that do not measure anything in terms of numerical values. They are usually based on subjective human judgment. For example, customer experience in an e-commerce site is an immeasurable factor that is still crucial for the business’s success. It is compiled from the feedback of the customers regarding their experience in various areas, such as website design, ease of using your site, product pricing, ease of checkout, multiple payment options, etc.
4. Actionable metrics
The metrics that are used for improving and optimizing work or for decision making are called actionable metrics. These are the metrics whose results are directly tied to specific actions. Actionable metrics indicate what is working and what is not working in your operations and dictate what you need to do to correct, improve or mitigate the work.
5. Vanity metrics
Some metrics are designed to make you feel good but do not carry any significance as indicators of progress or the state of your business. They are rightly called vanity metrics. For example, if you are running an e-commerce business, and the number of visitors to your site per day is high, it can give you the grand illusion that consumers like your brand. But this metric means nothing if the traffic is high but conversion, which is more important for an e-commerce business, is low.
6. Informational metrics
Informational metrics, as the name suggests, are metrics that convey information that does not determine actions or measure goals. They just provide some inconsequential yet interesting information. For example, counters on websites that denote the total number of visitors who have visited your site so far, give a piece of interesting information. But it does not carry any other significance. For example, the number of visitors a site attracts does not directly impact the business.
7. Key metrics
Key metrics are the ones that stand out as business-critical metrics used to measure the organization’s goals. Key metrics are important for your strategy.
What are key metrics?
Key metrics or key performance indicators (KPI) are used to measure the performance of business-critical initiatives, processes, or objectives. Unlike metrics, key metrics are usually tied to specific targeted objectives and are measured against predetermined goals. They act as benchmarks and indicators for various aspects of the performance of an organization. Unlike metrics, key metrics are not necessarily standalone units of measurement; they can be derived by combining multiple metrics.
For instance, the sales conversion rate for an eCommerce business is a key metric calculated by dividing the metric – ‘number of sales’ – by another metric, ‘Number of users’ multiplied by 100. These two metrics in isolation do not measure or indicate a business-critical performance parameter. But the key metric of sales conversion ratio, obtained by combining those two metrics using a formula, gives a real picture of sales performance. How much of your user base in your online store actually makes a purchase helps you determine the effectiveness of your strategy. If the number of sales is 1000, but if you have nearly a million users on your site, it may still be deemed a failure. This is the kind of meaningful insights you can get by measuring relevant key metrics.
Key metrics compare and combine various metrics to build insights that can help you identify gaps and larger organizational problems that are not visible to the bare eyes. Every organization may have different objectives and priorities. In accordance with that, what is critical to their business also varies; as a result, the key metrics they need to track may also vary.
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What are key metrics?
7 reasons why Key metrics are important.
- The performance of a data-driven organization needs to be constantly monitored and optimized scientifically to remain successful. It requires a careful selection and monitoring of key metrics that are relevant to their organization.
- Key metrics help you measure progress and create action plans to optimize your operations.
- They help you verify performance, quantify the growth of your organization in key areas and pinpoint issues.
- They help you identify the important factors that contribute to your success and let you reinforce those areas to sustain your growth.
- Key metrics enable you to achieve your fiscal goals and ensure the success of your strategy.
- They provide actionable insights that can help you improve your business performance, goal-setting, and achievement of goals.
- Key metrics help you make better decisions based on facts and data and steer your organization and operations in the right direction. Failing to measure these key metrics can lead to bad decisions and, ultimately failures.
5 Key metrics to track: Examples and importance
There are many key metrics that an organization may need to track for an overall understanding of performance in various key areas. Organizations are unique, and depending on important critical objectives choice of key metrics varies. Following are some examples of key metrics.
1. Sales growth rate
Every company exists to sell products or services. So, the organization’s growth is directly linked to the growth in sales. The sales growth rate is a key metric that measures the increase in the number of sales between two months or years. This comparison helps you measure and verify whether the sales and marketing initiatives you implemented resulted in desired sales growth. This helps to validate the effectiveness of your branding, sales strategy, marketing strategy and product launches.
2. Cost of customer acquisition
Acquiring a new customer requires a concerted effort from the marketing team to implement sound strategies and carry out the marketing plan involving various campaigns and other marketing activities. All these marketing efforts cost money. If the marketing efforts work properly, and if the strategy is implemented flawlessly, then the money spent will yield results in the form of new customers.
The customer acquisition cost is a key metric that measures the cost spent in acquiring one customer. However, the cost of customer acquisition cannot be calculated by simply dividing the cost spent in a particular period by the number of customers acquired during the same time.
This is because a customer may buy products worth $20 or $2000; the customer may also buy any number of times at various points of time. The worth of a customer varies according to how much he/she spends purchasing from you in the long term. So, the cost of customer acquisition should be measured along with the customer lifetime value. Ideally, the cost of customer acquisition is good when the customers are retained and when they make multiple purchases, and the total value of the purchases is far more than the cost spent on acquiring one customer.
3. Gross profit margin
The primary objective of any business is to generate profits, and having a good gross profit margin is key for the business health and profitability of the organization. Gross profit margin is a key indicator to measure your business’s financial performance.
Gross profit margin shows you the profit you get from your total revenue after subtracting the costs incurred during the production. This key metric is derived by subtracting the cost of goods sold from the total revenue of your business, divided by the total revenue. Ideally, the gross profit margin of a company should provide adequate profits after covering all the operating costs.
4. Current ratio
Acquiring new assets and purchasing business-critical equipment and facilities require healthy liquidity. Only if you have liquidity then can you raise funds to make these purchases. Creditors approached for a loan will also consider the loan only based on the ability to repay by measuring the liquidity of the organization using the key metric, ’current ratio’.
To calculate the current ratio, you need two metrics – current liabilities and current assets. Current assets are liquid assets that can be converted into cash within a year. Similarly, current liabilities or debts that you can repay within a year. The current ratio is obtained by dividing current assets by current liabilities. The ideal current ratio should be between 1.5% and 3%;
5. Lead conversion rate
Your marketing team may be conducting successful campaigns and generating a healthy number of leads. But the number of leads you get is meaningless if most of them don’t purchase from you. So, the lead conversion rate is an important key metric that determines the effectiveness of your sales team and their ability to convert leads into customers. It can also help you verify whether your marketing efforts are generating quality leads or not. Lead conversion rate plays an important role in optimizing your sales and marketing strategies and initiatives to generate quality leads.
Lead conversion rate can be calculated by dividing the total number of conversions by the total number of leads generated, multiplied by 100. The more your leads convert into sales the more effective your sales and marketing teams are.
Metrics – Frequently asked questions
1. How do you identify key metrics?
You can identify key metrics relevant to your business by choosing KPIs linked to your business goals.
2. What are key metrics in business?
Key business metrics are used to measure the performance of business-critical initiatives, processes or objectives.
3. What is the difference between metrics and Key metrics/key performance indicators (KPI)?
Metrics are the standalone units of measurement that indicate the overall business health of your organization, but not a complete picture or an aspect of an organization’s performance. In contrast, key metrics act as benchmarks and indicators for various aspects of the performance of an organization. They are usually tied to specific targeted objectives and can be derived by combining multiple metrics.
4. What are the seven types of metrics?
- Goal metrics
- Quantitative metrics
- Qualitative metrics
- Actionable metrics
- Vanity metrics
- Informational metrics
- Key metrics
Final thoughts:
Organizations can have a great strategy and objectives aligned with every department. The strategy remains ineffective unless the objectives are assigned to key results with measurable metrics that are periodically tracked. Key metrics play a crucial role in every organization’s success. They trace the performance of initiatives, help managers define what success looks like, and ensure that the team is moving in the right direction. Profit.co’s OKR management platform comes preloaded with over 400 KPIs and metrics that can help you measure your progress and meet your business’s short- and long-term goals. To learn more about how Profit.co can help your team, schedule a free demo with our OKR experts today!