Business Metric Definition
A business metric is a quantifiable measure businesses use to track, monitor and assess the success or failure of various business processes. The main goal of measuring business metrics is to track cost management, but the overall point of employing them is to communicate a company’s progression toward certain long- and short-term objectives. This often requires the input of key stakeholders in the business as to which metrics matter to them. Some organizations outline business metrics in mission statements, which require buy-in from all levels of the company, while others simply incorporate them into their general workflows.
For example, marketing departments track metrics pertaining to the success of campaigns and statistics that characterize their reach; sales teams monitor leads — by using lead generationand lead scoring — new opportunities and the amount of business at various stages of the pipeline; and executives concentrate on overall financial statistics of the company.
Business metrics mean nothing without context attached to them; companies view metrics through the lens of existing benchmarks, practices and objectives. Business metrics are different from key performance indicators (KPIs) in that metrics are used to quantify and track all areas of a business whereas KPIs specifically target certain areas to gauge performance. Examples of key business metrics include:
Sales revenue, or the income generated from all customer purchases minus the cost of, in a B2C context, returned or undeliverable items. Sales revenue is tied to such factors as advertising campaigns, price changes and seasonal changes.
Customer loyalty and retention measures how companies attract customers, get them to buy something and keep buying in order to develop a long-term, profitable relationship to boost sales. Companies gather feedback from customers via surveys, direct feedback in-store or other types of analysis in order to improve service offerings and foster loyalty and retention among the customer base.
Cost of customer acquisition includes all activities pertaining to marketing and sales processes and campaigns. This metric is determined by dividing the total acquisition expense by the total new customers over a given period of time.
Churn rate focuses on lost customers and the costs to acquire them. It’s seen as a solid indicator of a rising cost of customer acquisition and a lowering in the customer’s lifetime value to a company.
Productivity ratios determine how productive a company’s staff is. This is calculated by dividing a department’s actual revenue by the number of employees and comparing that number to various industry statistics to gauge the effectiveness of staff. This metric can be applied to almost any aspect of the business.
Size of gross margin is calculated as the company’s total sales revenue minus its cost of goods sold, divided by the total sales revenue and then converted into a percentage. The greater this figure is, the more money an organization keeps on each dollar of sales to service its other costs and the more profits it receives. Companies track margins to improve efficiency and find opportunities to lower costs, thereby increasing their margins.
Monthly profit/loss is a measure of fixed and variable operation costs paid regularly each month, which include rent, insurance, mortgage payments, taxes, salaries and utilities.
Overhead costs refer to fixed costs that do not depend on the level of goods or services the business produces, such as salaries and rents. Overhead costs are not affected by how much a business earns or grows, so they need to be tracked separately.
Variable cost percentage is a measure of one of the components of total cost — the other one being fixed costs. Variable costs include the cost of sold goods and other items that will increase with each sale, such as the cost of raw materials, labor, shipping and anything pertaining to the production or delivery of products.
Inventory size is the business’ assets that are ready to sell or will be ready to sell at any given time. Businesses must constantly keep track of inventory to account for how much product they have to sell, which represents their primary source of revenue.