9 simple but vital customer metrics
These 9 are commonly used simple metrics, pick the couple most relevant to your business, and make sure the measures do not become KPI’s, invoking Goodhardts law.
Customer retention: the rate at which you keep customers after acquisition.
You need to determine the time period, which is logically linked to the time it takes to acquire a customer, the number of customers at the beginning and end of the period.
Formula: End customers – added customers /start customers.
Customer churn: the rate at which you lose customers. It is the opposite of the retention calculation.
Formula: Start customers – end customers/start customers.
Lifetime customer value: the revenue, or if you prefer, gross margin a customer delivers over the average lifetime of the relationship. Averages as we know can be misleading, so when there is significant variation between classes of customers, or customers of a particular line of products, calculate them separately. This enables focussing of your marketing effort where it will deliver the optimum return.
Formula: Average order value X average repeat purchase X average lifetime.
Cost of customer acquisition. Obviously it is useful to understand the cost of acquiring a new customer, particularly when it is compared to the lifetime value. The time period over which the calculation is made needs to be agreed.
Formula: Number of new customers / the amount spent on revenue generation activities.
Average order size. Simple calculation again, and a very useful one, to be calculated over a set period. The standard nomenclature in FMCG for this calculation, which is a core metric of retail performance, is ‘Basket size’. In FMCG this is often further broken into differing demographics, time of day, and the variety in the basket, which delivers necessary information for pro active category management. It is often useful to also do the calculation by delivered margin, which is the margin delivered at the checkout, plus margin delivered for shelf space and paid promotional activity.
Formula: the number of orders /total revenue from those orders.
Share of Wallet. This is probably my personal favourite, particularly in B2B situations. It almost always creates a vigorous discussion about the extent of the ‘wallet’, which is an extremely valuable strategic conversation to have. When the relationship is strong, having this conversation with the customer concerned can give you valuable information, they will tell you what you have to do to get more business, or indeed, retain what you currently may have.
Formula: Total sales from a customer/total expenditure made on products you could supply.
Order frequency. Depending on the product category, order frequency is often useful, particularly comparatively and as a trend.
Formula: time between orders.
Net promoter score. NPS has become very popular as a single measure, and is now often used as an objective, but as we know, once a measure becomes an objective, it ceases to be a good measure. (Goodhardts law) Nevertheless, all you need, usually via an after sales survey that asks us to rate the business 1-10, on the simple question ‘would you recommend this product/service to a friend or colleague? . (which is why we get so many requests to fill in a survey every time we ask a question)
Formula: Percent of promoters – percent detractors.
A score of 9 & 10 are seen as promoters, 0 – 6 detractors, and 7, and 8 as neutral and not counted.
Strategically important customers. These customers are not always the biggest, or most profitable customers, but for one reason or another, they are the most important to your future. Perhaps they are currently small customers showing strong growth, are aligned closely to your strategic objectives, or vital to the smooth operation of your supply chain. In some cases they may not even be current customers, they may be a potential customer who offers access to an adjacent market to which you aspire, or someone who is developing technology that will enhance or disrupt your current market. There is no formula for this class of customer, just a recognition that they are key in some way to delivering strategically, and in tough times, they are the ones on which you focus limited resources.
It is easy to become overwhelmed by measures, which diminishes their value. Pick the few that are the key leading indicators in your business, and track them and most importantly, track the drivers of the measures in your business that deliver them.
When you need an experienced set of eyes, give me a call.
