What is the Most Important Sales KPI for Small Businesses?

When it comes to measuring sales key performance indicators (KPI), a number of small businesses spend far too much time measuring sales from every possible angle. While it’s important to widen the perspective when measuring business success, there’s still something to be said for keeping things simple. So, when a customer asks me: “What is the most important sales performance indicator for small businesses?” I always answer with customer retention.

Increasing Retention

Customer retention is the ultimate endorsement of your company’s product or service offering. In today’s economy, it’s far more difficult to retain customers. Of course some of this has to do with competition and the multiple options customers have. However, another factor has to do with the number of businesses that close due to bankruptcy and poor financing.

Given the current state of the global economy, it’s fair to assume that your customer retention has been affected through no fault of your own. Losing customers to bankruptcy is never easy, and while there is little small businesses can do to stop this from happening, there is a lot they can do to improve their customer retention by adopting some proactive approaches to customer management. Here are three simple steps to determining your company's customer retention. At the end, there are additional sources on some reward programs your company can run to increase its customer return rate.

1. Determine Customer Order Frequency

The first and most important step to measuring your company’s customer retention is to determine you customers’ standard reorder points or reorder frequency. In this case, some industries must measure customer retention week to week, or month to month, while others must measure customer retention quarter to quarter, or year to year. If your small business sells to customers with constant and linear demand patterns, then customer retention will be measured within weeks or months. If your business sells to customers with infrequent order patterns, then customer retention will be measured by a given quarter or year.

2. Calculate Customer Retention as a Ratio

When it comes to measuring customer retention, the calculation itself is rather straightforward. It simply involves taking the original number of customers relative to the number of repeat customers. For example, if your small business had 50 customers in one quarter, and only 25 returned the next quarter, then your customer retention ratio would be 50%. In this case, your company retained 50% of its original customer base. Here is the calculation explained below:

Returning Customers / Original Customers = 25 / 50 = 50%

3. Calculate Volume of Repeat Business as a Ratio

It’s one thing to know how many customers return to place orders, but it’s something else entirely to know how much actual business your company retains. This portion of customer retention is about measuring the amount of repeatable volumes your small business retains with its customer base. It requires your sales team be proactive in gap analysis by customer account.

The simplest way to express this is by using the same ratio as described above. While the ratio can be expressed as a percentage, it’s always better to put a dollar value figure on the amount of repeat business. Continuing on our example above, if your company had $10,000.00 of business in one quarter and $5,000.00 in the next, then the business retention would again be 50%

Returning business value / original business value = $5,000.00 / $10,000.00 = 50%

Some of you might be reading this and immediately think this is all rudimentary. For some of you it might be, but for others it might be an eye-opener. I’ve kept this process simple in order to make the analysis simple. I find that businesses tend to complicate how they measure sales performance. When it comes to discussing the most important sales performance indicators for small businesses, customer retention has to be at the top of the list.

To retain more customers means to beat your competition and to reaffirm your product’s pricing. In essence, it is the ultimate assurance that your company’s overall market strategy is working. One tool that can help you increase customer retention is to run a back-end rebate and reward program. I've included a video below and a table that shows how the rebate program works and why it not only increases customer return rates, but why it also helps to provide your company with up-to-the-minute data on market pricing.