What are the best metrics for growing your business?
Here’s a question. Are you measuring anything on a weekly, monthly or quarterly basis? Has this led you to change your business?
The thing about metrics is they need to be frequent and impactful. Always. If they’re not telling you something that’s going to make you change, they’re a waste of time. They need to focus on the stuff that makes a difference, even if this is difficult.
Too often we find our clients are measuring things they’ve always measured without really knowing why. The easy things. They’ll spout statistics proudly but many of them are meaningless. It’s like the story of the drunk man looking for his keys under a lamppost. He didn’t drop them there, but it’s where the light is!
Over the years, I’ve used metrics to help me scale businesses from zero to £30m in just five years. Learn from my experience – there are only a few that you need. Metrics are crucial to everyone knowing the score and without them, you’re playing blind. But which ones are the best for growth?
A single number that drives your economic engine
More than anything else, you need to land on a single metric that will drive your economic engine. We return again to Jim Collins’ ‘hedgehog concept’. It’s just too important to ignore. Remember those three interlocking circles – what are we best in the world at, what are we passionate about and what drives our economic engine? It’s the third we’re talking about here.
At Rackspace and Peer 1, the two businesses that I scaled as MD, our metric was monthly recurring revenue. We were maniacal about it, tracking it every day. It drove our focus on service as a differentiator from our competitors and made decisions easier. In both businesses, it was the lifeblood of the organisation, eventually reaching 95% of all revenue Interestingly, when I took over as MD of IT Lab, our monthly recurring revenue didn’t cover our costs. The company was on its way to oblivion. We had to get ourselves into a position where our cost base was covered by recurring costs. That was when we turned a corner.
At the beginning of our relationships with new clients, there’s often no clarity or focus on net new customer acquisition – another central metric. When we put this in place, the business starts to grow. We ask clients, ‘What’s your biggest challenge?’ Some are hanging on by their fingernails to rapid growth and they need to steady the ship. For other’s there’s stagnation. There’s never a goldilocks moment with growth!
Leading and lagging indicators of your economic driver
Once you’ve found the single number you want to track, you need to work out the things that impact this number. The metrics that underpin the metric. At both Rackspace and Peer 1, we worked out that NPS (Net Promoter Score) was a leading indicator of changes in monthly recurring revenue. So this is what we tracked.
NPS is one of our top recommendations – it’s head and shoulders above any other customer satisfaction survey out there. It’s simple, easy to implement and provides a constant finger on the pulse of your business. Acting as an early warning system, it will alert you when things aren’t right with customers and help you make strategic decisions by slicing data into customer cohorts.
At Rackspace, we staggered reporting so that Net Promoter data came out every week. This was analysed on a rolling, three-month basis to smooth out any peaks and troughs. Then we held a drains-up every quarter. In our experience, the data tracked the same way as Fred Reichheld’s had in 2003 when he wrote his influential article in the Harvard Business Review. We replicated his finding with real-life data that gave us an insight into the likelihood of churn or increase in spend.
I was talking to an outsourcing business in the Philippines this morning – a client who’s been with us for around six months. At our recommendation, they’d just completed their first round of NPS. And their score? 81. Terrific! They were genuinely thrilled. This score fits as their business is growing 100% year on year through word of mouth referrals. It was great to have our coaching validated and now they had a benchmark to use as they move forwards. We’ll move on to breaking their NPS data down by customer cohort and teams – valuable information to guide their future decision-making.
For an upcoming episode of our Melting Pot podcast, I interviewed John Ratliff, former CEO of Apple Tree Answers, recently. He now heads up Scaling Up Coaches after selling his business for an impressive sum. In the past, he’s surveyed his staff, asking the question, ‘Would you recommend Apple Tree Answers as a place to work?’ But after a while, he realised this wasn’t telling him anything. He changed the question to, ‘How happy are you working at Apple Tree Answers?’ and, bingo. Suddenly the data lined up. He found the happiest call centres had the highest NPS.
You may feel measuring staff happiness isn’t important. You’re wrong. Getting a weekly handle on how everyone’s feeling in the business will help you avoid so many pitfalls and problems. There are a variety of tracker apps on the market but the best, in our opinion, is Friday Pulse. Like NPS, it’s simple to introduce, engaging to use and a goldmine of useful data.
Find metrics that correlate
Back to that conversation with John Ratliffe. At Apple Tree Answers, they were spending thousands of dollars every month on mystery shopping and CSat scores with their US trade body. One day, John wondered whether there was any correlation between this work and NPS. In fact, he found the opposite. The call centres with the highest CSat scores from the mystery shoppers were the ones with the lowest NPS. And the reverse was also true. So, he was spending all this money on meaningless data based on what the industry thought was important! Instead, he decided to focus on NPS because he could see it correlated to customer satisfaction and increased spend.
This was exactly the methodology we adopted at Rackspace and Peer 1. Add in Friday Pulse, and you can see direct correlations between employee happiness, NPS and revenue growth. If customer satisfaction is important to you because it drives monthly recurring revenue, then staff satisfaction is a precursor to customer satisfaction. There’s a beauty in the way all these metrics line up and link together
John also found that one of the things that drove NPS was staff churn. In his industry at the time, annual churn was more than 100%. By focusing on this, he was able to get it down to 20%. This had a knock-on impact on staff happiness, NPS, customer retention, spend and referrals. Great!
So, you’ve identified a single economic driver and adopted NPS and Friday Pulse. What else should you look at? For me, if you’re measuring monthly recurring revenue, I would also track churn and ways of minimising it. When we did this at Peer 1, we broke churn down by customer cohort and it showed up some surprising results. We had a group of high-value customers, spending more than £10K a month, that had negative churn. They were growing by 4% month on month.
This 5% of our customers represented 60% of our revenue. But we were only servicing them with 6% of our customer experience team. As a result, we were over-servicing 12,500 smaller clients and making barely any money from them. If they all churned, we’d be only marginally worse off. This understanding led to a big re-structure to focus the majority of our resources on our higher value, larger customers. And exponential growth followed.
Sales and marketing metrics
It always staggers us how smaller businesses measure their sales and marketing activity. We ask them, ‘What’s your customer lifetime value?’ ‘Dunno’, they reply. ‘Your core customer?’ ‘Er, dunno’. ‘Your customer acquisition cost?’ You guessed it. No idea. They tell us they have a plan, but it’s a revenue goal more times than not. A cash amount. Most of the time, the sales plan isn’t broken into numbers of net new customers and product sales. There’s no specificity.
How can you possibly know how much to spend on Marketing, or Sales for that matter, if you haven’t broken down your data and analysed it? You can’t expect it to deliver what you want. The reason why this data often doesn’t exist is because it’s difficult to measure. It takes concerted effort to crunch through it. But it will pay you back in spades.
Start by agreeing a definition of terms and common reporting. What is a lead? What’s an opportunity? What does close look like? This stops any ‘them and us’ between Sales and Marketing. Work out how you’re going to generate leads. They’ll either come to you as inbound or outbound opportunities, word of mouth referrals or through the channel. What are your plans for each of these types? Benchmark where you are now and the activity you need to change that. Those lead types will track through the organisation and convert at a particular rate. Each will have its own close rate. They’re worth a particular average order value and will take a certain length of time to close. Track every aspect of this activity so that you can test any assumptions against hard data.
Your plan needs to take into account your business model and the revenue growth you need. Particularly, look at what proportion of growth you want from existing customers and what from new. Too often, sales teams focus on the existing customer base instead of on net new customer acquisition. Switch their attention to new core customers – the ones that you know are most profitable. This is how you grow your business.