Why gathering and applying data is fundamental to successful entrepreneurship
Monday, July 29, 2019/
One of the most important entrepreneurial lessons one can ever learn is this: it’s never too early to start gathering data on your business. Specific data is invaluable when making decisions about your company’s future.
But which metrics are most important? How do you measure them? And how do you act upon those measurements?
Some data is more important than others when it comes to a budding business, and there are calculated and careful ways to use that information to move a business forward.
Metrics and analytics
Let’s start by teasing out the vocabulary.
Metrics and analytics both fall under the umbrella of data. ‘Metrics’ are the measurements themselves, while ‘analytics’ refers to the information that can be gleaned from those metrics.
A simple example: the cost of customer acquisition is a metric. This is a static number that is discovered by dividing marketing and sales expenses by the number of new customers obtained within a given period. Analytics would be using that number to create a better process that will achieve a goal (such as reducing the cost of customer acquisition).
Metrics provide past data to inform analytics, while analytics impact future metrics.
Why it matters
Gathering data and using it to inform future business decisions might be the most fundamental process of entrepreneurship.
Success is largely about progress — consistently updating and improving your existing business functions. Businesses have to constantly work to be more efficient, more cost-effective, and more appealing to customers.
Metrics and analytics show business owners where to focus when it comes to improvement. When a leader knows where to put his or her energy, the company as a whole is much more likely to thrive.
Important metrics for young businesses
To identify some obvious metrics, ask yourself this question: how do you know if your business is succeeding or failing?
While this isn’t always a binary, it’s an important question to understand.
Consider what information tells you the most about your company’s performance. This is why metrics are sometimes called KPIs (key performance indicators).
Perhaps the most obvious answer to that question is sales revenue. But while this metric is informative, it’s not always a direct reflection of a company’s success — especially in the early days. Other equally important metrics that might tell you more about early success and potential for growth are as follows.
Annual sales growth
Especially for companies that have a seasonal component (for example, a winter gear e-commerce store), looking at your sales growth over the past year can be more informative than just examining sales revenue over the last month. The year mark can provide some excellent longer-term data for young companies.
Keeping your existing customers can be just as important as gaining new ones. Your customer retention rate (CRR) demonstrates how loyal your customers are, which can also be an indicator of potential future revenue.
Net promoter score
This metric, like your retention rate, also provides invaluable data about customer satisfaction. A simple 0-10 scale of satisfaction, measured by a quick customer survey, shows you which customers will enthusiastically promote your company and which customers were disappointed.
Using metrics to inform your next steps
Now that you’ve identified some key numbers, it’s time to think about how to use the data you’ve collected.
Start with these questions.
- What metrics do you want to change?
- How do you want to change that metric? Increase it, decrease it, level it out, and by how much?
- What steps can you take to make those changes?
As you move through the process of analytics, you might find you need to backtrack and gather additional metrics to inform your decisions. So, one more question: do you need more data?
Let’s use the customer retention rate (CRR) as an example. To calculate a company’s current CRR, subtract the number of new customers from the number of customers at the end of a given period. Then divide that number by the number of customers the company had at the beginning of the period. To get the CRR as a percentage, you multiply the final figure by 100.
So, if you start with 100 customers, gain 50 new ones, and have 110 at the end of the period, your CRR is (110-50)/100 = 0.6 or a 60% retention rate. Now, as a general rule, this is a pretty low CRR, but every business is different.
If you choose to identify this metric as a problem area that you want to work on, decide in what way you want to change your CRR. It’s always better to have a high retention rate, so you always want to increase this number — but that’s still too vague.
Be specific with your goals. By what factor do you want to increase your retention rate next quarter? The following quarter?
Once you have a clear goal or goals, you can create action items. To improve your customer retention rate, you might want to start with finding out why some customers left so you can specifically address their concerns. Perhaps your customer service needs work. Maybe an incentive program for loyal customers would improve your CRR.
These decisions are what separates great entrepreneurs from good ones.
Never too early
I started gathering data for my companies quite early, but we could have started even earlier. No other company is precisely like your own, so there’s no better data for planning improvements than your own.
No matter where you are in your entrepreneurial journey, there is likely to be at least one metric you can measure and analyse. The importance of this process is obvious, so don’t wait to get started!
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