Imagine a student starting an e-commerce T-shirt business, targeting the niche of anime fandom. The designs are custom-made, the price point is higher than the industry average and the business is booming. No matter how frowned upon, it is a winning formula.
So why is it the object of scorn? Because it is perceived to be a no-brainer. But easy money implies the existence of untapped potential, not in scalability but in efficiency – factors hardly considered.
Depending on the industry, this lack of consideration of factors turns high-profit businesses into fabled history. As is the case with the student, whose apathy for Inventory Turnover Rate (ITR) let fads capture his niche. ITR is one of many such Key Performance Indicators (KPIs) that may make or break a business.
As the name suggests, KPIs measure how well a business is performing. Revenue and profit margin are the two most intuitive KPIs, but they could mislead businesses as they turn a blind eye to long-term sustainability. Some KPIs that apply across industries are:
Inventory Turnover Rate: The rate at which goods are sold out and replenished, managing cash flow and helping prepare for trends.
Customer Acquisition Cost: The calculation of how much is spent behind a customer, helping pinpoint the efficiency of sales and marketing campaigns.
Customer Lifetime Value: The calculation of how much a customer may spend in a business in his/her lifetime, helping the business in revenue projections.
Click-Through Rate: The calculation of clicks (ads, purchases) against impressions (exposure) to measure the effectiveness of the content and keywords.
Net Promoter Score: A survey to assess how likely customers are to recommend the business, helping measure customer loyalty.
KPIs are as industry-specific as can be. A grocery store may need an Average Transaction Value to measure how much a customer usually spends to be able to upsell or cross-sell products. A hotel can adjust its pricing of rooms to attract customers based on the Occupancy Rate. In any event, the KPI must be quantifiable.
When pitching a new business, one should assess and adopt KPIs pertinent to the industry. A sample entrepreneurship pitch needs only to allocate a little room to name the KPIs without delving into the details, as that alone shows that the entrepreneur has a clear understanding of the market they are planning to disrupt. To the stakeholders, this implies that the pitch is not an abstract idea but a data-driven, long-term vision to sustain.
So, as an idea tiptoeing on the blurred lines of different markets, how to know which KPI is pertinent? A mnemonic that helps assess the importance of a KPI is SMART – Specific, Measurable, Achievable, Relevant, Time Frame. And, if we realise the opportunity cost of the hard work of tracking KPIs and crunching numbers instead of going with our intuition, that is when we will have embodied the saying ‘work smart, not hard.’