Types of performance metrics for businesses

Given the variety of available business measures, this is a crucial question. Some firms may try to monitor too many things if there is a lack of clarity around the business goals. These four questions can be quite helpful in determining what matters most to any firm, even if every business is unique and hence the metrics that matter for each of them vary.

• Is the metric directly related to the success of the company?
• Does it provide a meaningful way to anticipate future performance?
• Can it be measured fairly?
• Can and are they allowed to affect the business team responsible for the metric?

What are performance metrics for businesses?

Business metrics are quantitative measurements used to monitor business operations and assess your company’s performance. Because there are so many various types of firms and procedures, there are hundreds of these measures.

Monitoring the metrics that track the performance of a company’s many divisions or departments, such as manufacturing, marketing, and sales, is typically their responsibility. More generic measures are monitored by senior management. CFOs monitor variables like net sales, operational costs, and operating profit to track earnings before interest, taxes, depreciation, and amortization (EBITDA), a general indicator of profitability. A high-level perspective of a company’s financial performance is provided by the CFO dashboard shown below.

Related: Types of performance metrics for employees

Main Points

• To increase business performance, it is essential to monitor the appropriate business KPIs.
• With so many potential business indicators, it’s critical to select the ones that are most significant to your company.
• Every company should monitor the performance of its sales, marketing, finances, and human resources (HR) departments to understand how it is doing and identify areas for improvement.

Examples of performance metrics for businesses

Trackable Sales Metrics

Sales metrics track and assess a person’s, a team’s, or an organization’s performance and sales-related actions across time (for example, weekly, quarterly, or annually). Analysis of sales analytics reveals what is and isn’t functioning as well as offers suggestions for improving sales success. Here are a few crucial sales KPIs to monitor.

Net sales income:

Every firm depends on revenue, which affects every facet of growth, notably sales. You could want to monitor a variety of sales revenue KPIs, depending on the size and maturity of your company. Typical revenue created per user or customer, revenue by product or product line, annual recurring revenue (for instance, from multiyear contracts), average revenue earned per user,  revenue by territory or market, and revenue generated per sales rep. Formulas for each of these and more are available in our sales metrics guide. But above all, be sure to track net sales revenue. The formula for calculating net sales is:

Net sales = Gross sales – Discounts – Returns – Costs associated with discounts and returns

Quota attainment: 

Similarly, there are numerous indicators focused on sales objectives, although quota attainment might be the most common. Are you hoping to boost the proportion of reps that complete their quotas in full? Find out how many there are already. Results can help you focus your efforts in the right areas. Are you debating whether to increase sales in certain locales or markets? By comparing these goals’ performance to a quota, you can keep an eye on them. The equation is:

Quota attainment = Amount of sales achieved by a particular rep or region / Goal for that rep or region

Growth rate: 

A crucial general sign of your company’s health is year-over-year growth, which is very simple to assess. It reveals how well or how poorly your sales staff is doing in comparison to the competition when compared to industry benchmarks. The equation is:

Sales growth rate = (Current year revenue – Previous year revenue) / Previous year revenue x 100

Churn rate: 

The percentage of consumers that cancel or choose not to renew their service or product contracts or subscriptions is known as the “churn rate.” This measure cuts across departments: It illustrates a sales team’s capacity for client retention. Finance leaders keep an eye on turnover rates to determine how they can affect sales and earnings at a company. It may indicate increasing or decreasing user counts and, consequently, revenue for Software as a Service (SaaS) companies. The marketing division may also be affected by all of these issues and will need to assess the channels and campaigns that succeeded or failed. Rising churn rates could be a sign that a firm’s products or customer service methods need improvement, or they could be a sign that the company is losing customers to rivals. The equation is:

Churn rate = Number of customers lost during period / Starting number of customers at beginning of period x 100

For instance, if a business has 5,000 customers at the beginning of Q3 and 4,000 at the end of Q3, the difference (1,000) in the number of customers represents a 20% churn rate.

Tracking Marketing Metrics

Direct mail, email, websites, and social media are just a few of the various channels available for businesses to sell and advertise their goods or services, so it’s important to determine which combination would be most effective. Adopting important marketing KPIs enables your marketing team to assess how well its strategies and channels support the growth of your company.

Return on marketing investment (ROMI): 

ROMI focuses on the profits of incremental sales that can be ascribed to marketing activity, or more simply, profit earned by the marketing department. This makes it a little different and more difficult to calculate than most ROI metrics. For each marketing or advertising channel, it can be calculated independently. ROMI can shed light on the importance of marketing initiatives generally or highlight differences. For each marketing or advertising channel, it can be calculated independently. ROMI can distinguish the relative performance of various marketing channels and campaigns or offer insights into the value of marketing activities generally. The equation is:

Return on marketing investment = (Sales growth – Marketing cost) / Marketing Investment x 100

Consider investing $10,000 in an email marketing campaign that results in $60,000 in sales at a 20% margin and $12,000 in profit for the business. Your ROMI is (60,000 X.20 – 10,000) / 10,000) x 100 = 20% for this effort.

Cost per lead (CPL):

What does it cost to locate, entice, qualify, and hold onto a client? You can allocate your budget more effectively if you know how much each lead costs. However, just because a channel has a higher CPL doesn’t imply you should stop using it: Those customers might actually convert at a higher rate or spend more than customers gained through a lower-CPL channel.

Cost per lead = Total marketing spend / Number of new leads

Customer acquisition cost (CAC):

The price incurred to convert a prospect into a client is known as the customer acquisition cost (CAC). All marketing and sales expenses, including personnel wages and benefits as well as media expenditures, should be factored into CAC. It’s advisable to compute CAC over a time frame that encompasses the highs and lows of your company; a year is typical.

Total marketing and sales expenditures/number of new clients = customer acquisition cost.

Your CAC is $1,000,000 / 500, which equates to $2,000 per customer if you invest $1 million in marketing and sales and acquire 500 new clients.

Customer lifetime value (CLV):

Without knowing the value of a customer’s business, it is pointless to know how much it costs to acquire them. CLV is the revenue made from a customer throughout their whole customer relationship. However, you should measure the average worth of all consumers, or similar customer groups, rather than the value of each client. Keep in mind that some businesses, such as those that would benefit from client references or recurring revenue, operate differently. The equation is:

Customer lifetime value = (Average transaction value x Average number of transactions in a year x Average customer retention in years) x Profit margin

Let’s say a business has a 20% profit margin overall and keeps clients for an average of five years. The average transaction value for the business is $100, and each consumer makes 10 purchases a year. Its CLV is equal to ($1,000) (100 x 10 x 5) x.20.

Customer retention:

Knowing how costly it is to acquire new customers demonstrates how important it is to retain the customers you already have. Customer retention is the percentage of existing customers that stay during a specific period. The formula is:

Customer retention = (Number of customers at end of a period – Customers added during the period) / Number of customers at beginning of the period

For example, if a company had 500 customers at the start of a year, added 50 customers during the year, and ended with 500 total customers, it would have a customer retention rate of (500 – 50) / 500 or 90%.

Website traffic-to-lead ratio: 

A sales-qualified lead (SQL) from your website is someone that is not only aware of the company but interested enough to enter information about themselves on the website too, for example, to get past a filter or to get your newsletter. The formula is:

Website traffic-to-lead ratio = Number of leads / Number of unique website visitors

A business whose website is visited by 500,000 individuals in a month, 5,000 of whom convert to leads, has a traffic-to-lead ratio of 1%.

Conversion rate:

Conversion rate is a way to measure the percentage of users or customer prospects who complete the desired action, such as making a purchase, registering an account, or starting a free trial. Tracking this metric can help you get a feel for how well your marketing strategy is working. The formula is:

Conversion rate = (Conversions / Total unique visitors) x 100

For example, suppose a subscription business offers a free trial to 1,000 potential customers in total, and 200 of them take advantage of it. The conversion rate is (200 / 1,000) x 100, or 20%.

Website bounce rate:

Like conversion rate, this metric can help you track how effective your marketing strategy is. Bounce rate tracks how well a website landing page generates visitor interest by calculating the percentage of visitors who enter the site and leave before viewing other pages within the same site. The formula is:

Bounce rate = (Number of site visits that access only one page / Total number of site visits) x 100

If a site has 100,000 visitors, and 50,000 of them view only one page, its bounce rate is (50,000 / 100,000) x 100, or 50%. The higher the bounce rate, the less likely the site engage customer interest. A low bounce rate is ideal.

Financial Metrics to Track

For finance teams, the metrics that matter most are the ones that reflect the financial health of the business. After all, a company’s survival hinges on its financial health. Thus, most financial metrics concern factors like revenue, cash flow, accounts receivables, assets, and liabilities there are many financial metrics to track.

Net income:

Also known as the bottom line, net income is generally one of a business’s biggest financial concerns. It’s also an important starting point for calculating other key metrics, like net profit margin and earnings per share. Since it reflects total business expenses subtracted from total revenue, net income generally appears at the bottom line of a company’s income statement. Net income can help assess whether revenue exceeds business expenses and, if so, by how much. The formula is:

Net income = Total revenue – Cost of goods sold – Operating expenses – Other expenses – Interest – Taxes – Depreciation and Amortisation

Net income is different from gross income, which only subtracts the cost of goods or services sold from revenue.

Net profit margin:

One of the most important indicators of a business’s profitability, the net profit margin measures how much actual profit is netted for each dollar of revenue made. This is important because revenue increases may not always translate into increased profitability. Before calculating the net profit margin, a business must calculate its net income. The formula for net profit margin is:

Net profit margin = (Net income / Total revenue) x 100

Gross profit margin:

Unlike net profit margin, gross profit margin shows a company’s profits before subtracting interest, taxes, and operating expenses like rent, utilities, and wages. A healthy gross profit margin plays an important factor in whether a business can cover all of its expenses. The formula is:

Gross profit margin = (Revenue – Cost of goods or services sold) / Revenue

Current ratio:

To stay financially fit, a business must be liquid and able to pay off its financial obligations. The current ratio measures a company’s ability to pay off financial obligations that are due within a year and is calculated as the ratio of current assets to current liabilities. Current assets are those expected to convert to cash within a year (such as accounts receivable), while current liabilities are obligations due within a year (such as accounts payable). The formula is:

Current ratio = Current assets / Current liabilities

Generally, a current ratio above 1.0 is considered healthy. A ratio of 2.0, for example, suggests the business has two times more current assets than current liabilities. However, a current ratio above 3.0 could indicate the business isn’t efficiently handling working capital. Note that the current ratio is only a quick, short-term snapshot of solvency and must be calculated regularly.

Working capital:

All businesses need money to meet short-term needs, but having too much cash on hand at any given time means the company is wasting an opportunity to invest in future growth. Keeping a close eye on working capital can help you figure out ways to free up cash, use funds more effectively or learn to reduce dependence on outside funding while getting a clear sense of the business’s liquidity. The formula is:

Working capital = Current assets – Current liabilities

Accounts receivable turnover ratio:

Businesses must be able to effectively bill and collect payments from their customers or clients. The accounts receivable turnover ratio measures how effectively the accounts receivable department collects debt owed by clients. The higher the ratio, the better the company is at collecting payments, which makes it more likely to have cash on hand to make its payments or invest in growth. A lower turnover ratio can indicate illiquid customers, slow-to-pay customers, or an inefficient debt collection process — potentially stunting a business’s growth. The formula is:

Accounts receivable turnover ratio = Net credit sales in a given period / Average accounts receivable of period

Percentage of accounts payable overdue:

It’s not only important to keep track of accounts receivable; it’s also key to pay close attention to accounts payable. The percentage of accounts payable overdue can indicate cash flow problems — the more overdue payments, the more likely the business is to have trouble paying suppliers, indicating a need for funding or a new business strategy. The lower the percentage, the better a company is at paying its debts on time.

Accounts payable overdue rate = (Accounts payable overdue / Total accounts payable) x 100

SaaS Metrics to Track

Many important SaaS metrics overlap with key marketing and sales metrics. For example, churn rate, customer acquisition cost, customer lifetime value, and customer retention are all extremely important for SaaS companies, given that the subscription-based business model relies heavily on keeping customers, not just acquiring them. Additional metrics that can provide actionable insights for SaaS companies include:

Monthly recurring revenue (MRR):

A key metric for SaaS companies, MRR is essentially a summary of all the revenue you expect to receive in a month. To calculate MRR, simply add up the total revenue from paying customers in a given month. However, more complex SaaS businesses generally need to factor in additional MRR calculations. For example, it’s a good practice to calculate the MRR of new acquisitions in a month, as well as “expansion MRR” from existing customers who upgrade their accounts or add new product features and/or users, and “churn MRR” — the monthly revenue lost from downgrades or cancellations. Tracking MRR metrics can help you better understand revenue changes, how well sales teams are doing and whether customers are satisfied or dissatisfied with your service.

MRR = Total revenue from paying customers in a given month

If you have 50 customers paying $500/month and 50 customers paying $1,500 a month, your MRR for that month would be (50 x $500) + (50 x $1,500) or $100,000.

New MRR = Total number of new customers in a month x Revenue brought in by new customers in month

If you’ve added 50 more customers in a given month, 25 of who pay $500/month and 25 of whom pay $1,000/month, the new MRR for that month would be (25 x $500) + (25 x $1,000), or $37,500. Gaining new customers is key to revenue growth.

Expansion MRR = Total number of customers who upgraded in a month x (New revenue – Old revenue)

If 10 customers upgraded from $500/month plans to $1,000/month plans, your expansion MRR would be $5,000, or 10 x ($1,000 – $500). In other words, you’ve expanded your revenue without having to add new customers.

Churn MRR = Total number of customers who canceled or downgraded x Lost revenue

If three customers canceled their $500 subscription and two customers were downgraded from a $1,000/month plan to a $500/month plan, your churn MRR equals (3 x $500) + (2 x $500), or $2,500. Significant churn indicates customers may be dissatisfied with your service.

The average revenue per account (ARPA):

Also known as annual revenue per unit (ARPU), ARPA measures the average revenue generated by each account, usually every month. It’s important to have access to your billing or accounting system to accurately calculate ARPA. 

Tracking ARPA can help give you a sense of how your revenue evolves. Some SaaS businesses might track the ARPA of long-term customers and compare it with the ARPA of new customers to see whether new acquisitions have different purchasing preferences, providing insight into how customers use and perceive your product. The formula is:

ARPA = MRR / Total number of customers in that month

If your monthly recurring revenue is $100,000 and you have 200 customers, the average revenue per account is ($100,000 / 200), or $500.

Customer engagement score:

Customer engagement scores can help you understand how much and how often your customers engage with your SaaS solution, such as how often they log in, how often they use specific tools and features, what they use the software for, and more. 

For example, if a customer regularly uploads files and uses various features throughout the day, they’re far more engaged than a user who simply logs in once a day to check reminders or alerts. By tracking customer engagement, you can better predict customer churn and be proactive about creating solutions to retain valuable customers.

There’s no one formula to calculate a customer engagement score, so a business must create its model and system to do so. Create a list of inputs or actions that predict customer engagement, perhaps based on the habits of long-term customers. Then score each input or action based on how critical it is to customer retention and add up each customer’s engagement score. Continually evaluate your rating system to ensure you’re appropriately picking the right features that predict retention and churn.

Net Promoter Score (NPS):

NPS estimates the likelihood that users will recommend your service to others. It’s particularly important for subscription businesses because their financial health depends on retaining as many customers as possible and, preferably, getting them to upgrade and/or refer the product to colleagues and friends. 

 

NPS is usually measured through a one-question survey to customers: “How likely are you to recommend us to a friend or colleague?” with a 0-to-10 scale (where zero means they won’t recommend your product and 10 means they definitely would). Respondents are then bucketed into the following categories:

• Detractors, or respondents who answer with a 0 to 6.
• Passives, or respondents who answer with a 7 or 8.
• Promoters, or respondents who answer with a 9 or 10.

To calculate:

NPS = Percentage of promoters – Percentage of detractors

For example, out of 100 survey respondents, 20 are detractors, 50 are promoters and 30 are passives. Your NPS would be 30 (50% – 20%).

Human Resources Metrics to Track

Human resources metrics can help indicate employee satisfaction and performance. These metrics generally track data related to employee turnover, development and engagement, company culture, and training costs — all of which can help you spot workforce trends and dynamics and proactively solve potential issues, like burnout or ineffective training programs. Key HR metrics to track include:

Employee turnover rate:

Every company will lose employees from time to time, but the less turnover, the better. High turnover rates can reflect talent management issues, unhappy workers, or a pattern of hiring employees unfit for their positions. In general, an average turnover rate between 10% and 20% is little cause for concern, but numbers vary by business and by industry. 

Turnover rates higher than the industry average suggest competitors may be more attractive to employers. Note that turnover can be voluntary or involuntary, and it’s important to measure both to track how often employees leave on their own accord and how often they are let go. Some businesses may also benefit from calculating the turnover rate for high performers.

Turnover rate = (Number of separations in a given period / Average number of employees in period) x 100

Revenue per employee (R/e):

Sometimes regarded as a sales metric, revenue per employee is important in the HR context because it can help you get a read on the productivity of your entire workforce. The more revenue per employee, the more productive a business is and the more likely it’s efficiently using resources — both of which can directly relate to greater profits. 

 

However, revenue per employee will differ greatly across industries, so it’s important to only make comparisons with businesses similar to your own. An online bank, for example, might have far fewer staff than a brick-and-mortar bank chain requiring staff at each location. To calculate:

Revenue per employee = Total revenue / Current number of employees

Employee net promoter score (eNPS):

eNPS is an effective measure of employee satisfaction. Like the traditional NPS, eNPS offers a standardized approach to understanding how employees feel about the company, using a scale from 0 to 10. However, eNPS measures the likelihood that an employee would recommend your company as a place to work or the likelihood they’d recommend your products to family or friends. Again, scores of 0-6 are detractors who are unlikely to recommend, 7-8 are passives and 9-10 are promoters who are highly likely to recommend your company. The formula is:

eNPS = Percentage of promoters – Percentage of detractors

Training spends per employee:

Companies should track training expenses to see whether they’re getting a return on their investment. For example, companies with high turnover ratios may be investing more in training an employee than the revenue that employee generates before they leave the company. Similarly, tracking training expenses alongside employee productivity and profitability can help a business determine whether training strategies are effective. The formula is:

Training spend per employee = Total training expenses / Total number of employee

Career path ratio:

This metric helps track the ratio of vertical promotions to lateral transfers. This is important for both employees and businesses. If companies want to promote long-term job satisfaction, employees generally need room to grow and learn new skills, whether it’s via vertical promotion or applying for a lateral move. For companies, turning inward to find talent can be more cost-effective than recruitment. Tracking career path ratios can help a company measure employee mobility. The formula is:

Career path ratio = Total promotions / (Total promotions + Total transfers)

Values above 0.7 indicate more vertical promotions, meaning the organization may be getting too “top-heavy” and should look to start expanding roles laterally. Values under 0.2 indicate more lateral transfers, suggesting not enough employees are being primed for promotion.