Facebook’s recent struggles speak loud and clear to how the market values revenue. In their most recent earnings release, second-quarter revenue was up 42% but the stock still took a 22% hit!
An increase in revenue of that size is fantastic growth for any company (public or private), so why the major hit to the stock price? Investors and Facebook understand that revenue (no matter how good or bad) is a lagging metric and represents where the company has been, not where it’s going.
While Facebook is a public company with thousands of employees, the general principals of predicting the future look the same as any business we work with on a daily basis. Growing a business requires optimizing a business around the “leading metrics.” As an example, for Facebook, these metrics would be:
- Acquire new users for $X
- Make money off new users and more money off of existing users
By optimizing these two things revenues will continue to grow and the business will increase in value.
The brutal truth is that the majority of entrepreneurs and business leaders don’t understand the leading metrics that drive their own business. Every month there’s a 2 hour meeting reviewing the P&L, building a to-do list, and then going out to try and fix any issues. Even with all this work, month after month little to no progress is made.
While reviewing your financials is an important part of monitoring any business and I’m always game for a good P&L analysis, we encourage companies to step outside of the business and focus on what drives their business and to identify, measure, and improve their leading metrics.
Here you can check out an simplified example scorecard that we use to monitor businesses on a weekly basis and review with clients monthly. When building out the initial scorecard we focus on 5-10 initial metrics and work to provide the data and strategy to make improvements.
Over time we adapt the metrics as the business grows, but in general for eCommerce businesses we focus on:
- Customer Acquisition Cost (CAC)
- Average Order Value (AOV)
- Unique Sessions
- Return on Ad Spend (ROAS)
An improvement on any one of these metrics will eventually lead to an increase in revenue, margin, and a more in-depth understanding of what levers to pull to try and grow your business.
Every business is different and we love learning about new models so if you’re ready to work on your business instead of in it drop us a note at [email protected]