Today, it’s easier than ever to collect vast amounts of data about our customers. There are many low-cost Point Of Sale systems out there which provide you with some nice reporting features that you can take advantage of to help you grow your business and make better business decisions.
However, many small business owners aren’t aware of how important it is to track your progress and how to use metrics to make sense of it all and measure their success.
Here are three simple metrics every business owner needs to know that can provide a starting point for taking your business to a whole new level.
Average Transaction Value (ATV)
Average order value (ATV) is pretty self explanatory. It gives you the average of how much is spent on average with each transaction made. This metric is very important, as it can help you decide on whether you should be focusing on increasing your order frequency (by using more touch points in your marketing) or your average transaction value (using up-sells and cross-sells).
How to calculate Average Transaction Value
Simply divide your total sales for the day by the number of total transactions for that same day.
$5000 turnover / 100 Transactions = $50
Customer Lifetime Value (CLV)
What is every new customer worth over the lifetime of their relationship with your business? It’s a simple metric with big implications. Knowing the lifetime value of a customer is a crucial part of understanding how much is reasonable to spend on acquiring a new customer. Measuring CLV is also a good way to determine whether your business is taking full advantage of its customer relationships. In many, if not most cases, it costs less money to increase revenue from existing customers than it does to acquire new ones. Yet still, most business owners are still more focused on acquisition than retention.
How to calculate Customer Lifetime Value
CLV = Average Transaction Value * Customer Frequency * Average Customer Lifespan
$50 Average Transaction Value * 1 purchase per month * 12 months average retention = $600
Cost of Customer Acquisition (CAC)
What does it cost you to acquire a new customer? While the importance of knowing the cost of acquiring a new customer is obvious, surprisingly a lot of business owners don’t pay as much attention to this metric as you’d expect them to. Keeping customer acquisition costs top of mind can benefit a business in numerous ways.
For starters, many companies spend more than they estimate on customer acquisition and in many cases, they continue to invest in marketing channels that make little sense given the lifetime value of their customers.
How to calculate Cost of Customer Acquisition
CAC = Total Ad Spend / Number of New Customers
$500 Facebook Ad Spend / 50 New Customers = $10
If, like in the example above, your Customer Lifetime Value is $600, it makes sense to spend $10 to acquire a new customer. However, if your CLV would only be $20 you might need to look for a new strategy to acquire new customers or focus on increasing your Average Transaction Value, Purchase Frequency and Retention Rate.
Are you currently tracking any metrics that have helped you grow your business and make better decisions in your marketing? Let me know in the comments below!