The following excerpt is from franchise expert Mark Siebert’s book The Multiplier Model. Buy it now.
One of the most important things you can do to help ensure the success of your business is to determine your key performance indicators (KPIs).
KPIs are the inputs into your business system. Each KPI has a target range that, if achieved and combined successfully with other KPIs, will allow you to manufacture the output of your business profitability.
Read on for what you should know about KPIs and how you can apply these practices to your own business.
Related: Busting Franchising Myths and Choosing the Right Opportunity
KPIs can be industry-specific
KPIs vary substantially depending on the industry. For restaurants, a few of the many important KPI measurements include the sales-to-investment ratio, food costs, labor costs, average ticket, table turns and occupancy costs.
If you’re in the hotel business, some important KPIs include overall occupancy rate and average revenue per occupied room.
If you’re a manufacturer, you’ll certainly want to look at things like the product return rate and net promoter score.
If you’re in the business of selling advertising, you may want to focus on sustaining your customer base — so KPIs like customer retention rate, customer churn and repeat purchase ratio might make your list.
And if you are in a membership-based, fee-for-service business, like a massage or fitness operation, you may want to monitor metrics like revenue growth per customer and time between purchases.
KPI targets can differ within the same industry
KPI targets can be different within the same industry, too. For example, in the restaurant industry, a steakhouse might aim for food costs in the range of 35%, while for a pizza restaurant, that number might be closer to 30%. But shoot for those numbers at a pretzel shop, where 20% would be considered high, and you could have a disaster on your hands.
Different types of businesses in the same broad category (restaurants, in this example) can have very different target KPIs because of other changes in the business model.
A pretzel shop generally has significantly lower sales than a typical steakhouse. They also may rely on impulse purchases in a high-traffic location, so they don’t need to spend the same amount on advertising as a steakhouse would. In addition, because its footprint is much smaller, a pretzel shop can pay less in rent (although it’s often higher when calculated on a per-square-foot basis).
Related: Considering franchise ownership? Get started now and take this quiz to find your personalized list of franchises that match your lifestyle, interests and budget.
Be aware of KPI repercussions
When determining your KPIs and target ranges, you should also consider that any changes you make may have implications in other areas of your business.
Going back to our restaurant example, the logical assumption is that we want to keep our food costs down. After all, each percentage point saved on food costs, all else being equal, will translate to a significant increase in profitability. But everything is not always equal.
If you can reduce your food costs by eliminating waste, improving portion and inventory controls or establishing better systems for pricing or purchasing, then you could improve your Money Machine.
On the other hand, if you had to sacrifice quality, raise prices unreasonably high or make your portions so small that your customers left dissatisfied, your reduced food costs KPI could have a severe negative impact on your overall profitability.
In other words, anyone can decrease food costs down to 2% if they charge $50 for a burger. But how many will they sell?
Likewise, you could reduce your labor costs in your restaurant by simply hiring fewer people. But if that results in poor service and unhappy customers, you may have missed the point of the exercise. So as you start identifying the KPIs and target numbers that will ultimately drive your business, bear in mind that changes to your KPIs may have unintended consequences.
Categorize your KPIs
Generally speaking, the KPIs for a small business can be grouped into several major categories: marketing metrics, sales metrics, production and financial metrics, and client satisfaction metrics. And these KPIs generally occur in that approximate order.
Marketing drives sales. Sales drive production. Production drives client satisfaction. And client satisfaction (and the word-of-mouth it can deliver) drives repeat and new business. Effectively categorizing your KPIs, determining your target ranges and developing the right strategies to hit them will put you in a good position to achieve and maintain profitability.
Related: Is Franchising Right For You? Ask Yourself These 9 Questions to Find Out.
Get started with The Multiplier Model
Going from small business to successful startup to scalable growth takes more than just good luck. It takes a system. Over the last 34 years, franchising consultant and growth expert Mark Siebert has been sought out by more than 70,000 executives looking to expand their companies. Out of those 70,000, only 5,000 had the right systems in place to go from successful to scalable. In The Multiplier Model, Siebert discusses the factors that determine if an entrepreneur is ready to scale their venture — and the best ways to get started. Read more.
This story originally appeared on Entrepreneur
