Profitability is by far the most important element of any successful business. Let’s put it this way: knowing your profit and how it stacks up against your previous performance are critical indicators of your progress. Not only do these numbers show you how much your business grew, but they can also provide valuable insight regarding the direction you’re heading. Now that you’ve acknowledged its importance, you are probably curious about the way you can measure the profitability of your business.
The simplest and most efficient method of staying updated on this matter is to implement a POS system. Modern POS systems allow you to analyze various metrics and reports, which you can compare with the previous data. Let’s explore the top 3 metrics to evaluate when trying to figure out the ROI of your company.
Cost per customer acquisition
Determining how much you need to spend to draw in customers is essential for start-ups and businesses that are in the initial stages. Just because you are making a lot of sales doesn’t automatically mean you’re also turning a profit. In fact, you might even find out that you’re spending most of your cash on generating leads.
Obviously, spending too much in this direction eats away the profits you make and it can have a negative impact on your company’s progress. On the other hand, spending just the right amount means saving money you would otherwise spend on marketing campaigns and overhead costs. Thanks to a POS system, now you can determine the optimal value you should invest for acquiring a new customer.
More often than not, a smart entrepreneur will look over the data related to the gross margin in order to determine whether a certain business is lucrative and worth investing in. The gross margin refers to the sum of cash obtained after subtracting the costs of the goods sold from the total revenue, which is afterwards divided by the total revenue.
Take note that the higher the number obtained via this process, the more profitable the company. It goes without saying that higher gross margin numbers make a company automatically more attractive to potential investors. For instance, in case the number obtained is of 50%, it means that the company would keep $0.50 from each $1 of revenue.
Keeping track of this metric will offer you an accurate insight on how far you’ve come and if you need to make any adjustments. In the event when you notice a constant increase of the gross margin, it means your company is continually becoming more lucrative.
Customer retention rate
Although the customer retention rate is often overlooked, let’s not forget that in general it’s considerably easier to sell to existing customers than acquire new ones. In fact, some financial analysts have mentioned that selling to loyal customers is roughly 50% easier. If you were to do the calculations, then focusing on increasing your retention rates by a minimum of 5% translates into a 75% increase in profitability. In addition, you can also make savings, as you don’t have to spend so much on generating leads anymore.