Business Metrics

Introduction
Welcome to this lesson on working with business metrics!

As a business analyst, it is important to analyze and convey your company's performance using
specific metrics in each of the following areas:

 Marketing
 Growth
 Sales
 Finance

This lesson focus on metrics that are commonly used across industries and a wide range of
business roles. At a high level, these metrics are related to the sales, finances, customers, and
website.

Lesson Outline

Topics Covered

1. Key Performance Indicators: We will start with a discussion about key performance
indicators and how it differs by industries.
2. Business Process Flow: Then we will proceed to go through the business process flow
across various business divisions. This will provide the context for learning about the
business metrics. Business metric:
We will take on each business area, such as marketing and growth, and introduce you to a
metric commonly used to measure success in that business area. We will discuss what
each means, and how to calculate it. We will practice calculating the metrics and
applying the metrics, and when and where to use the metric. To do this, we will focus on
3 main elements related to metrics:

 Evaluate important business metrics

 Interpret and analyze these metrics
 Create visualizations of these metrics

1. Distribution and central tendency: We will circle back to the topic of data distribution
that you learned about in the previous lesson, and why paying attention to the distribution
of the data and to the choice of measure of central tendency is important.
2. Grouping data: We will end with a discussion on how to look at the data across groups,
cohorts, and time.

Key Performance Indicators

Businesses need to be able to track how they are performing on key goals or objectives - whether
they are growing number of customers, bringing down their costs, increasing revenue on an
ongoing basis, and myriad others. Key Performance Indicators or KPIs are how they measure
their success on each of their key business objectives.

Which KPI to use?

The decision regarding which KPI a business analyst should use depends on several factors,
including which industry or domain they are working in, which business function they are
focusing on, and the type of data they have available to them.

KPI for different industries and departments - https://kpidashboards.com/kpi/

Asking Data Questions

The KPIs you use will be determined by the questions you need to ask. As a business analyst,
you are tasked with gathering the appropriate data to help solve business problems. To get to that
solution, you will need to:

 Identify what needs to change

 Communicate this change to stakeholders in clear manageable chunks of data
How to Ask the Questions

There are several steps needed to determine the questions to ask—

1. Identify the business goal and objectives.

2. Narrow down the type of data needed to answer questions.
3. Identify the KPIs that will be useful to show whether you are making progress on your
business goal.
4. Conduct the data analysis using the KPIs and use visualizations as part of the analysis.
5. Provide recommendations and findings based on the completed data analysis.
6. Create succinct and visual presentations for the stakeholders.

Business Process Flow

To understand business metrics, you first need to understand a typical business cycle so you
know where to use the metric. So let’s first understand that.

A business has two primary goals:

1. Increase revenues
2. Reduce costs

Metrics allows businesses to assess whether they are on track to meet these goals.
Business Process Flow: Marketing
There are some typical costs involved in the marketing process. Marketing teams incur these
costs as they think about how to market their product to their customers.

Marketing is about how and where you get the word out about your product. Traditionally, there
were just three channels to do:

1. Newspapers
2. Radio
3. Television

However now, the internet makes marketing and advertising possibilities limitless and
companies use a variety of social media platforms to market such as

 Instagram
 Twitter
 Facebook
 Google Search
 Linked In
 blogs

Online marketing can take advantage of cookie tracking, which allows customer tracking across
time and platforms.

Knowing a customer's online roadmap enables companies to pinpoint places for targeted
advertising to these customers and other potential customers like them.

Business Process Flow: Growth

What are typical questions business analysts try to answer when they are considering issues of a
company's growth? To grow the business, companies need to not only focus on existing
customers, but also on new customers. This problem is at the heart of the growth metric.
Executive boards, investors, and sales teams are constantly keeping their eye on this critical
question about a company's overall health.

Let's continue with our WeCart example to broadly discuss the business question of growth. One
of the questions the company's executives have is, "How can the company grow its customer
base?". WeCart can grow in two ways:

1. Increase new customers

2. Increase the order size and repeated orders of existing customer

As a business analyst, you need to break down the question of business growth to decide how to
quantify or measure the answer for the growth question.
Customer Journey
How can WeCart track a customer's online path to and through their website?

For WeCart, tracking customers through online spaces can take several steps:

 WeCart can identify specific ad platforms, like search engines and social media sites, to
quantify how many people see its ads.
 When people click on WeCart's ads, they go directly to WeCart's site and a cookie is
placed on the viewer's browser. Cookies allow a company to track what site visitors do
on its website.
 The business goal for site visitors may be for visitors to engage with a prompted call to
action on the website; for example, giving an email address or downloading a brochure.
 If a visitor, now a potential customer, adds something to a cart, cookies begin tracking
their path to becoming a paid WeCart customer.

The visitor/customer journey described above can be described as 5 stages in which marketing
teams used various digital tools to attract potential customers and convert them into actual
customers. :

1. Awareness
2. Interest
3. Desire
4. Purchase
5. Post-purchase

This journey can all be tracked along the marketing funnel, which will be discussed on the next
page.

New Vocabulary
 Call To Action (CTA): A marketing term that refers to an action a website visitor is
supposed to take when given a specific prompt on a website. These can be words or
phrases, or icons that prompt and encourage the user to perform the action.
 Post-Purchase: Actions customers take after purchasing an item that promotes and
increase sales and advocate on behalf of the company. For e.g., coming back and
purchasing more items, sharing or liking the company or product on social media, taking
pictures of the item, and tagging it on Pinterest.

Marketing Funnel
The marketing funnel is the process of tracking and analyzing each step of the customer
journey with data.

Marketing Funnel Metrics

Impressions & Reach – building brand and product awareness using ad platforms and search
engine optimization (SEO). SEO allows ads to show up for the right mix of search terms as
people search online

 Impressions – an instance of an advertisement appearing on a website when it is viewed

by a visitor.

Lead generation – measures how many visits are made to the website.

 Click – every time a website visitor views the ad and clicks it

 Click Thru Rate – number of users that clicked an ad or clicked a link sent via email
 Cost Per Click
 Cost Per Lead – indicates a user has become a potential customer or lead because they
have expressed interest in the company by downloading a document, creating an account,
or providing an email address.

Conversion – when a lead converts to a paid customer

 Customer Acquisition Cost

Two Additional Levels

Before we move on, I wanted to share 2 more measures that companies use.

Loyalty

To grow their revenue and company profits, companies don’t just want their customers to buy
once from them, but to come back to their website. Especially if the product is not a high-priced
product. That customer loyalty allows you to track how many revisits a customer is making after
their first purchase, or how many of the customers have continued shopping after their first
purchase.

Metrics: Some commonly used metrics include Repeat Purchase Rate and Net Promoter
Score. We will not be going in-depth with these, but please do check out the resources below to
learn more about them.

Advocacy

Another level companies sometimes track is whether their customer is advocating for their
company. That is, saying good things about the product and services. Leaning on social media
provides a great opportunity to do just that.

Metrics: Some commonly used metrics include Customer Referrals and Leads from Social
Media. For example, as the paid customer tweets about the company, likes the product on FB,
provides a good rating on Amazon or the company website, analysts can use those metrics, such
as ratings and likes to show how many of the customers serve as advocates.
We will not be going in-depth with these last two stage levels, but we have provided some
resources below to help you understand these more.

New Vocabulary

 Search Engine Optimization (SEO): The goal of search engine optimization is to

influence the frequency of a website appearing in response to specific search terms in a
search engine. You can learn more about it on this Wikipedia page(opens in a new tab)
and this Forbes article(opens in a new tab).
 Lead: A potential customer interested in the products or services of a company.
 Conversion: When the lead (potential customer) purchases the products or services being
sold by a company.
 Repurchase Rate: This Medium blog(opens in a new tab) describes how to calculate
Repurchase Rate metrics.
 Net Promoter Score: This Wikipedia page(opens in a new tab) describes the calculations
and origin of NPS.

Click Through Rate (CTR)

As potential customers view the ads, some of those potential customers will click the ad and be
taken to the website for the company. To be counted at this level, the user needs to click through
the ad and the metric we use here is Click Through Rate.

Calculating WeCart's CTR

To Calculate WeCart's Click Through Rate (CTR) we need to calculate both the number of
impressions and the number of clicks. If you remember from the previous page:

 Impressions –
Impressions Clicks Click Through Rate (%)
record an instance
Facebook Ad 1100 15 1.36 of an
Google Search 2000 67 3.35 advertisement
Google Display 1500 25 1.67 appearing on a
website when it is viewed by a visitor. So if you visit the page 4 times, say in one hour,
the gross impression count will include each repeated viewing.
 Clicks – every time a website visitor views the ad and clicks it, this gets included in the
click count

The formula used to calculate CTR is: Click Through Rate (CTR) = (Clicks/ Impressions) *
100

WeCart's CTR

Interpretation of CTR

The Click Through Rate is an informative metric that informs your marketing team whether they
should try and increase the number of impressions or when they should reword the ad to increase
clicks. Remember, if a person clicks through the ad, it does not mean the customer purchased,
but rather they are showing interest in what the ad is about. When your CTR is low, your ad
campaign is not generating enough interest. When the CTR increases, it is an indicator of
effective and interesting content in your ad campaign, and that maybe you should increase the
number of impressions for that ad.

Some points to remember:

 Click Through Rate (CTR) is the ratio of users clicking on a link or an ad to the number
of total users who received the link or saw the ad.
 CTR measures the success of an advertising or email campaign.
 When the CTR increases, it is an indicator of effective and interesting content in your ad
campaign, and that maybe you should increase the number of impressions for that ad.
 In general, a 2% CTR is good, however, the rate will vary by industry.
Benchmarks for CTRs for Google Ads across industries.

 Check out this blog that provides useful benchmarks for CTRs across industries:
Wordstream Blog(opens in a new tab)

Advanced Topics

A related concept called Unique Click Through Rate is examined when looking at email
campaigns to see how often a link sent through an email was opened by the person receiving the
email. If the person receiving the email clicks on the link 5 times, the unique CTR stays one,
even though the total CTR is 5. Comparing the unique versus total CTR can help the analyst
know if the email campaign reflects the interest among potential customers.

We will not be going into unique CTR in detail in this lesson, but if you are interested in learning
more about it, the following web pages are good resources for you to explore.

 Pipedrive website(opens in a new tab)

o Discusses how Click Through Rate is one of the main email marketing metrics
showing the engagement of your target audience. Also addresses How to Improve
It.
 Optimizely.com website(opens in a new tab)
o Discusses how CTR is used to analyze and measure success for emails, webpages,
and online advertising.
Cost Per Click
Cost Per Click (CPC) refers to the cost to get a click on your ad. It helps us gauge the cost of
advertising on the specific platform, so we can see which platform is generating more leads.

Since platforms charge you for the number of ads on a page, you can compare the CPC for the
different platforms you are advertising on and see which platform is generating more interactions
with your website, or generating more traffic to your website.

The formula used to calculate CPC is:

Cost per Click (CPC)=Cost of Advertising on Source Platform ∕ Number of Viewers who Clicked
on the

WeCart's CPC

Source_platform Facebook Ad Google Search Google Display

Spend $1,500 $3,000 $5,000
Clicks 700 2,900 4,995
Cost Per Click $2.14 $1.03 $1.00
(CPC)

Interpretation of CPC
CPC is an indicator of the cost-effectiveness of the ad platform and a useful tool to compare and
strategize about which marketing platform is yielding a higher impression and reach and
resulting in potential leads.

Different ad platforms cost differently and it is important to remember that while one platform
might be cheaper it may not necessarily deliver you as many potential customers as another
platform. This is an important trade-off that analysts and marketing teams have to consider.

Some marketing channels or platforms convert amazing results but they are small and may not
generate as many customers. While you may decide to continue using them, you will also need to
identify marketing channels that deliver more potential leads.
Cost Per Lead
Remember, a lead is when a potential customer visits your website and does something on
the website in response to a prompt, such as share their email , or download a document, create
an account. Once the viewer takes that action, we know the viewer is showing some interest for
the product or service, and this could possibly lead to a sale. With Cost Per Lead we are
tracking whether the potential customer turned into a lead within a given time period, that
could be a 30-day window or 60-day window.

Let’s go back to our funnel - we are tracking how much did it cost us to get the potential
customer to take that action on the website. We are calculating the cost of generating interest and
nurturing the interest of the potential customer and figuring out how much did it cost us to get
them to get to this level? The metric we calculate is the Cost Per Lead.

The formula used to calculate CPL is:

Cost Per Lead (CPL) = Cost of Advertising on Source Platform

÷
Total Number of Leads
We Cart’s CPC

Source platform Facebook Google Search Google Display

Ad
Spend $1,500 $3,000 $5,000
Clicks 700 2,900 4,995
Cost Per Click (CPC) $2.14 $1.03 $1.00
Leads 16 63 112
Cost Per Lead (CPL) $93.75 $47.62 $44.64

Interpretation of CPL

CPL is an indicator of the cost-effectiveness of the ad platform and a useful tool to compare and
strategize about which marketing platforms yielded more leads. A low cost per lead means more
of this particular type of person is likely to be interested in the product.

Looking at the data above, we can see that Google Display and Google Ads were comparable in
terms of the Cost Per Lead. On the other hand, Facebook was costing us more to get to our
potential customers.

At the same time, Facebook also generated fewer clicks, so we need to consider if we need to
tweak the ad for the Facebook platform or consider other platforms that can generate the same or
higher number of clicks for a comparable price.

Useful Resources and Links

The following websites provide some benchmarks for Cost Per Lead by industries.

 Marketing Charts(opens in a new tab) – Cost per Lead (CPL) Benchmarks, by Industry,
Revenue and Company Size
 Hubspot(opens in a new tab) – Lead Generation: A Beginner's Guide to Generating
Business Leads the Inbound Way

Reflect

Given the marketing metrics you have calculated thus far for the Smoothie Rocks ad, which ad
platform would you recommend your marketing team revisit or tweak the ad for? Think about
the number of clicks, CPC, and CPL as you examine the data.

Things to think about

Our recommendation for the marketing team would be that Facebook appears to have the highest
Cost Per Lead of $5.83 while getting 450 clicks. For a comparable number of clicks (497),
Google YouTube not only has a lower Cost Per Lead ($1.18). Facebook also appears to have a
high Cost Per Click of $0.70 compared to Google YouTube ($0.23).

Customer Acquisition Cost (CAC)

Customer Acquisition Cost (CAC) is the metric used in the last step of the marketing funnel and
tells us what the cost is to acquire a paying customer.

Customer Acquisition Cost (CAC) = Total sales & marketing costs

÷
Number of converted customers

This is the point where a lead, or potential customer, has become a customer by buying
something on the website (a product or service). Most companies try to get that number under
25%.(opens in a new tab)

The ultimate goal is to increase the lead-to-customer conversions at the bottom of the funnel.
Considering the fact that customer shopping cart abandonment is over 60%, each company's goal
is to get higher levels of conversions for the minimum cost of sales and marketing. This leads to
the concept of optimizing the marketing funnel.

The next two videos will illustrate how to calculate the Customer Acquisition Cost in two
different ways.

Calculating CAC – Method #1

In this example, Customer Acquisition Cost (CAC) is calculated as:

Customer Acquisition Cost (CAC) = Total Sales & Marketing / Costs Number of Paid Customers

WeCart's CAC

August September October

Marketing Costs $9,500 $12,000 $5,000
Sales & Marketing Salaries $25,000 $25,000 $25,000
Overhead costs for Sales and Marketing $10,000 $8,000 $8,000
Total Sales & Marketing Costs $44,500 $45,000 $38,500
Number of Paid Customers 300 325 350
Customer Acquisition Cost (CAC) $148.33 $138.46 $110.00
Calculating CAC – Method #2
Sometimes it takes a long time for a lead to convert to a customer. For example:

 A lead may sign up for a free account or download for a few months and then be
prompted to become a paying customer then.
 A marketing campaign may intentionally take some time to realize the revenues it is
trying to generate.

To account for this 'lag' in revenue, CAC is often calculated based on a company's **average
sales cycle. (**averaged across the targeted time period )

Customer Acquisition Cost (CAC) is calculated as:

(Prior Month Marketing Costs + Weighted Avg Costs (Overhead+Salaries) ) / Number of Paid Customers Salaries)

WeCart's CAC

August September October

Marketing Costs $9,500 $12,000 $5,000
Sales & Marketing Salaries $25,000 $25,000 $25,000
Overhead costs for Sales and $10,000 $8,000 $8,000
Marketing
Number of Paid Customers 300 325 350
Weighted Average Costs 0.5(25,000+10,000) 0.5(25,000+10,000)+
(60 days/2 months) + 0.5(25,000+8,000)
Prior & Current Month 0.5(25,000+8,000)
Customer Acquisition Cost (CAC) N/A $133.85 $129.29

In the example above for CAC is September, since we want to average between August and
September, we take 1/2 of the expenses from August and 1/2 from September) and divide that by
the # customers in Sept.

Interpreting CAC
The CAC metric is an indicator of how much it costs to acquire a customer. If your customer
service team is doing a good job of keeping the paid customers happy, that can lead to future
leads and paying customers, and thus keep the cost of acquiring customers low. The company's
goal is to keep the CAC low while increasing revenue, as this positively impacts the profit
margin and profits.

Spending more than 25% of your revenues means you are spending too much to acquire new
customers and spending less indicates that you are losing business opportunities.
Recap
 Customer Acquisition Cost (CAC) = (Total marketing expenses + total sales expenses
and salaries)/ # of customers acquired
 The CAC formula can be modified with weighting for different months based on the
length of the sale cycle.
 CAC is a useful metric used to get an estimate of how much it cost us to acquire the
customer in the period the money was spent to reach out to them.