What are KPI’s and why are they important?

One of the most important factors in running a business is actually one of the most overlooked areas of business. I know this because I talk to hundreds of business owners every year and I only find about 5% of them that have a clue about KPI’s.

So what are KPI’s?    KPI’s are Key Performance Indicators. These are the specific numbers that tell you what’s going on in your business and enable you to make educated strategic decisions to improve your business.

An example of KPI’s could be: sales, number of calls received, close ratio, amount of sales per product or service, amount of hits on your website, average AR days, etc. These are just some of the KPI’s you should be tracking in your business. Some of these should be tracked daily, some weekly, some monthly, and some quarterly.

Each business needs to customize their KPI’s to fit their business and start by selecting the most important 5 or 6 to start tracking immediately. Over time your list will grow as you learn what numbers you need to know.

So why do you want to pay attention and implement KPI’s? Simple… If you want to learn the fastest and most effortless way to grow your business, you need to master KPI’s.

Here’s a simple example of KPI’s for a Hair Salon.  For this example we will use just two KPI’s:  Average clients serviced per day and average sale per client.

Now those are just 2 KPI’s, but let’s see how this could be helpful to that business….

Let’s assume that the average clients serviced per day is 4 with an average sale of $45.  If this person works 5 days a week we can come up with estimated revenues of $900 per week (4 clients per day times 5 days in a week times $45 average sale per client).  Let’s also assume that these numbers are the same for 10 stylist that you have in your business.  So now the revenues are $9,000 per week ($900 times 10 stylists).

Now to put these KPI’s to work for you, let’s assume you can come up with 1 strategy for each KPI that will increase it by just 10%.  That brings your average clients serviced per day to 4.4 and your average sale to $49.50.  Doesn’t look like much until we multiply it out.  Now our weekly revenues per stylist are 4.4 customers times $49.50 in average sales for a new total of $1,089 per stylist or 10,890 for your whole team of 10.  When you look at it over time it’s even more attractive.  That extra 1,089 per week turns into 56,628 over the course of just 52 weeks (1 year) and over $283K over 5 years.  That’s a lot of money if you ask me.

But here’s the fun part.  If you know your average client visits per day and your average sale, it doesn’t have to stop here.  You could continue to work these numbers and improve them dramatically just by adding a single strategy here and there that will increase both areas.

Another KPI for this type of business is called, “Frequency of Purchase”.  To some people it can be referred to as average number of transactions per year, but I like frequency of purchase.  Think about this for a minute.  If your client visits you once every 8 weeks that winds up being about 6.5 visits per year.  Not bad, but if I know this number I can now work to improve it by implementing simple strategies.  So lets say I can reduce this to visiting me every 7 weeks.  I now go from 6.5 visits per year to 7.4 visits a year.  Again it doesn’t sound like much, but what if you have 1,000 clients like most hair salons?  You’ve just added over 900 visits at about $50 each to your bottom line.  That’s another $45K just by getting clients to come back a little more often.

These are some great practical examples that I actually use for a hair salon client of mine. 

Just remember to start small with a couple of KPI’s and build from there.  I like to start with 5 to 6 KPI’s at first and build up from there.  Just think about the numbers you need to know to manage your business and over time others will show up.  Also, be sure to monitor these weekly.  After all, you don’t want to wait until the end of the month or end of a quarter to spot a trend and make adjustments.  You want to make adjustments quickly so you can maximize your efforts and reduce loss of possible revenues.

If you have questions or want help setting up your KPI’s, just send me an email at michael@michaellejeune.com and I’ll setup a free KPI coaching session for you.  Just act fast because I only have 3 to 4 sessions like this open per week and they will fill up.

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