How do you run your business? What numbers are meaningful, and on what intervals do you review them?
When FringeSport was a side project, I mainly looked at revenue and gross product margin after projected shipping costs. I reviewed revenue whenever we got excited, which was daily or hourly, and margin rarely — usually only when we were pricing a new product.
The reason we chose these two metrics was that revenue showed the magnitude of our relevance to customers. Were people buying? How much were they buying? And, was revenue growing or declining? Gross product margin after shipping would show if our model was viable. Were we able to make enough money on every sale to theoretically support a proper business with selling, general, and administrative expenses?
In other words, revenue would show if our market was potentially big enough, while margin would show if the market could support a business infrastructure. Enough revenue plus enough margin equaled 4-hour workweeks and living on a beach! Or so we thought.
We also picked those metrics because they were fairly easy to access.
There were a few big downsides to this method. Most glaringly, the anticipated gross product margin after shipping can be harder to calculate correctly than revenue and is subject to degradation by unforeseen costs or discounting. For example, did our anticipated shipping cost for a product include a custom box? Or the oversize fee charged by the carrier?
Additionally, in the beginning we set our sights too low for margin. I initially thought that 30 percent gross product margin after shipping could sustain a business. And I was right. But I would never again start a product business with the expectation of sustaining selling, general, and administrative expenses on 30 percent gross margin. Most of my entrepreneur colleagues suggest a “keystone” margin of 50 percent. Some even suggest a “double keystone,” wherein product costs are 25 percent of the sales price. That’s a nice business if you can get it!
I now run the business on much more granular key performance indicators, which we review weekly, using a schedule and meeting agendas heavily influenced by the book Scaling Up: How a Few Companies Make It… and Why the Rest Don’t, by Verne Harnish.
Our top KPIs are now:
- Revenue by channel;
- Key product in-stock rate;
- Total dollars of inventory on hand, and on order;
- Web metrics: total traffic, conversion rate, average order value;
- Payroll, reviewed twice monthly, as per our pay cycle;
- All expenses, reviewed monthly unless something jumps out;
- On-time shipments;
- Shipping accuracy;
- Email response time.
We have many more KPIs, but these are the big ones that I look for on a mostly weekly basis. We use Google Sheets to collect these KPIs. Numbers above our goal we color green and number below are in red.
“Revenue by channel” shows us the sales health; we can quickly see what channels are under or over forecast.
The “key product in-stock rate” lets us quickly see if we have product in stock, while “inventory on hand” shows us if our inventory level is appropriate for our sales level. “Inventory on order” shows our major cash commitments in the future.
Our top-level web metrics show the health of the website, which is our primary sales channel. “Total traffic” shows if we are getting the raw leads to the site, while the “conversion rate” shows if our offering is compelling to the market. “Average order value” shows the relative size of our orders, which is fairly stable for most of the year, but with a dip in the holidays.
Payroll and all other expenses show the health of the business. The idea is to run more efficiently as we scale. But we have to constantly review our expenses to do so. Expenses have a way of creeping in, and up.
“Shipping accuracy” shows if we are quickly and correctly getting our customers the products they ordered.
Finally, “email response time” is a great, quick metric to let us see if we are getting back to our customers timely.
We dislike meetings. But with thoughtful KPIs and short, meaningful meetings on a regular schedule, we can make sure all leaders in the company have their fingers on the pulse, so to speak. We can quickly identify problem areas and celebrate our victories.
While we try to make the gathering of KPIs as painless as possible. They currently take a few hours per week for my staff and me to assemble. There is little value in the act of gathering the data once an employee understands the process and the reason for gathering the data. The value is in the analysis.
We forgo a few KPIs that I would love to have each week but are too time-consuming to gather. For example, a KPI that allocates all marketing, shipping, and customer service costs into all orders (on an order-by-order basis) would enable us to identify unprofitable orders, with all costs loaded.
What do you do for KPIs?