Managing by Metrics: How to Use Numbers to Optimize Your Business
What is measured is managed, meaning that by translating core business activities into quantifiable data, you are forced to both pay attention to the results and better able to make informed decisions about future directions.
Imagine a business where the opposite is true. Instead of quantifying their activities, the principals do business willy-nilly. Suppose no one pays attention to how much time is allocated to each project versus monthly retainer paid by the clients. It’s easy to see how a business run in this manner can easily end up losing money on each and every client they take on.
Sounds surreal, doesn’t it? But that’s exactly what happened to a supposedly successful law firm where everyone was so focused on doing the work and no one paid any attention to profitability – that is, until a consultant was brought in to analyze why the busy firm was losing money every month.
It all comes down to measuring and managing the numbers.
3 Key Metrics Every Business Needs to Measure and Manage
#1: Profitable Activities – It’s a simple enough question, but it often leads to surprising answers when you drill down to the nitty-gritty analysis. Sometimes the most profitable activities aren’t the big-ticket products or the huge clients because they cost so much to deliver or service.
For a product manufacturer, for example, it may be the high volume, low-cost products that keep the company in the black, but for a consulting services company, smaller projects may cost too much in administration versus the larger ongoing retainer clients.
#2: Effective Marketing Tactics – Marketing can be a huge cost, especially if you don’t know which activities generate the most business. It’s not enough to measure clicks and calls – what really matters is the quality of the leads generated by each activity.
For example, an advertising spend in Publication A may generate a lot of interest, but a low number of sales compared to Publication B that generates less interest, but a higher conversion. Knowing which ones converts to more actual sales will enable you to decide where to invest your future marketing budget.
#3: Costly Internal Systems – What activities cost your business more than they are worth? Is it the way you handle your financial reporting? Are ineffective meetings the culprit? Does your customer service system require a lot of extra steps to manage?
Internal systems can make or break your business because often instead of being thoughtfully crafted for maximum efficiency, they are inherited ways of doing things “just because”. Even the seemingly simple things like weekly reports that no one actually reads can add up over a year of doing them.
How to Use That Information to Optimize Your Business
Focus on Profitability – Focusing on profitability instead of generating any and all sales means being selective about which business you invest in acquiring and servicing. That may mean eliminating a product line altogether or firing a nasty client that costs more to service than you get in return.
Shifting your focus to profitable activities is the simplest way to grow your business because you are creating more space for higher profit activities. You can only do this IF you know your numbers.
Streamline Marketing – Measure and track every marketing initiative – from traffic generation activities such as Pay-Per-Click and SEO to publicity aimed at garnering media attention – so you are able to quantify which lead generation activities resulted in the most sales.
Review the results on a regular basis and reallocate marketing dollars to the activities that got the best results in terms of highest sales volume, highest average spend and lifetime value.
Eliminate Inefficiencies – Examine your internal systems and processes for potential cost leaks, unnecessary or inefficient processes that add very little value compared to the cost of doing them.
Look for technology tools that can automate or streamline clunky manual process, eliminate unnecessary levels of reporting or task management and evaluate inherited practices to see if they still fit with the current business model.