Decision-making is a core business skill.
Without the ability to make smart decisions, your business will be doomed to rely on luck and uncertainty, and could eventually crash from one bad decision.
But if one thing is true about decision-making, it is that having the right information at hand is critical for its success.
In short: you need to measure your business performance if you want to succeed.
Or as Peter Drucker said, “If you can’t measure it, you can’t improve it.”
When it comes to measuring the right KPIs for your business,derived metrics are fundamental to maximize your business performance.
Fortunately, this post will cover the definition and the importance of these types of metrics.
So, keep reading!
Derived Metrics: What Are They?
Whenever you gather data related to your finance, sales, customers, or products to convert it into information, you get something called a direct metric. A number that comes directly and with little to no alteration.
The number of sales, gross revenue, number of customers are all direct metrics.
The problem with these is that they don’t mean much when there isn’t enough context to correlate them with.
For example, you can have a lot of gross revenue. But it doesn’t mean anything if you don’t know if you have way too many employees, or if your customer’s churn rate is rising.
And here’s when derived metrics become important, as they combine direct metrics into math equations to define your performance more broadly and accurately — giving you a more insightful view of your business’s key processes.
Customer acquisition cost (CAC) is a great marketing KPI example. As it measures — on average — how much it’s costing you to acquire new customers.
You might have acquired a great number of customers, but if the cost was way too high, was it really worth it?
To know this, you can calculate another KPI called customer’s lifetime value (LTV), which determines how much money buyers spend in your business through their lifetime as customers.
You can take both LTV and CAC to calculate how profitable is for your marketing when acquiring customers — the famous LTVxCAC metric.
Without these, you’d be scratching your head wondering whether or not your business is heading in the right direction and whether you’re handling your customer’s journey properly. Your decisions wouldn’t be properly informed.
That’s what you can do with derived metrics
5 Reasons Why You Should Be Using Derived Metrics
Reason #1. It’s Actionable
After all, the only reason to track numbers and do maths is to make decisions — and decisions lead to action.
Direct metrics tend to be very superficial, as metrics like traffic and followers count are not telling you why they rise or fall, much less what you can do to control your performance.
Derived metrics, on the other hand, have enough context for you to analyze, discern, and spot what are the real factors affecting your business results.
Read also: Vanity vs. Actionable Metrics in Marketing
So when you compare, it’s evident how easier it is to come up with a next action when using derived metrics.
And the reason is simple, it’s easier for our brain to process a couple of KPIs that cover just every important aspect of a business, than watching dozens of vanity numbers that don’t mean much for your next strategy.
Don’t forget, there’s power behind simplicity. That’s why the better you understand the state of your business, the clearer you’ll see your path.
So when it comes to creating actionable strategies for the next quarter, ask yourself if the current picture of your business is broad enough to take action.
Reason #2. Expand Your Business Intelligence
Since derived metrics help you see the whole picture of your company. They’re an essential part of business intelligence.
Business intelligence is fundamental for businesses these days. Here’s how Cindi Howson — a top influencer in analytics and business intelligence — defines it in her book:
“Business intelligence is a set of technologies and processes that allow people at all levels of an organization to access, interact with, and analyze data to manage the business, improve performance, discover opportunities, and operate efficiently.”
Cindi Howson, Successful Business Intelligence.
Business intelligence is the practice of taking raw data and converting it into actionable strategies.
That’s why derived metrics are essential.
Because if you refine your metrics, you improve your capability to create the best strategies for your business.
And that’s the point of business intelligence in the first place. Or as Cindi Howson claims:
“Without people to interpret the information and act on it, business intelligence achieves nothing. For this reason, business intelligence is less about technology than about culture, creativity, and whether people view data as a critical asset.”
Cindi Howson, Successful Business Intelligence.
In short: The more essential metrics you use, the better you’ll be able to analyze and manage your data (business intelligence), and thus, you’ll boost your business performance.
Reason #3. Understand Your Customers
For some people, business intelligence is also market research.
This makes sense, considering how similar they’re when it comes down to gathering data about your customers.
In marketing, for example, it is key to research what your customers think, believe, and desire. As well as what are their demographics, psychographics, and how they behave online.
But qualitative research can only do much with surveys and focus groups. You also need to conduct quantitative research.
Derived metrics help you better understand your quantitative data by pairing the numbers you have at hand with actionable insights. For example, instead of merely measuring customer satisfaction ratings, repeated purchase numbers or more, you can pair these metrics with the ‘why’ behind customer decisions. This will enhance customer behavioral analysis and can drive your strategies.
Examples of derived metrics in this scenario include linking customer satisfaction and ratings to product survey results, reasons for any customer returns, and even customer lifetime value.
This provides you with a clearer view of your customer’s information, behaviors, and every number you need to optimize your marketing campaigns according to your target customers.
This is why tracking buyer’s behavior for customer’s analytics is so popular now, as it allows businesses to do multiple things like:
- Creating more accurate buyer personas.
- Coming up with the right marketing message that resonates with your audience.
- Segmenting your customer base, and categorizing their behavior.
- Promoting the right products to the right people.
- Understanding and improving your customer’s lifecycle.
- Measuring how your audience reacts to your marketing content.
Understanding your target audience will always be key for any successful business. Don’t sleep on your customer’s data.
Reason #4. Build Predictive Models
You can make better decisions if you have a sense of what will happen in the future.
Derived metrics, in general, helps you project how your business will look like the next year. Because it can take historical and recurrent data to measure not only how your business is doing today, but how it performs over time.
For example, measuring a customer’s lifetime value allows you to have an idea of how much revenue you’ll get from your new customers, how much value you derive for your advertising expense, and can even be linked to your customer acquisition cost (CAC).
Derived metrics allow you to build predictive models that use machine learning and advanced AIs to learn a behavior and estimate how your business might look in the future.
This is one of the most advanced analytics methods. And it comes with tons of benefits such as:
- Giving you enough momentum to make better decisions faster rather than losing time trying to predict the future from your gut.
- Identify when a project is about to go off the rails and take proper action on time.
- Focus on the metrics that are essential for your goals. Not limiting yourself to what you can measure.
- Easier to manage, since you only need a couple of metrics instead of dozens.
Derived metrics allow you to build this kind of predictive model, making the best out of your data.
Reason #5. Get a Bird’s-Eye View Over Your Business
Remember, you can’t control what you can’t measure.
Managing and formulating strategies becomes far easier when you have a clear understanding of what’s happening in your company.
Derived metrics are great for giving you a broader view of how your business is performing — especially when it comes to KPI dashboards.
Having a comprehensive dashboard that shows every single fundamental KPI is what all decision-makers need at all hours of the day.
There’re tons of analytics software out there where you can build and have access to a dashboard in order to manage your business with ease.
The benefits of business intelligence tools are almost endless, such as:
- Faster and more accurate reporting.
- Being able to analyze the competition.
- Great data quality.
- Improved operational efficiency.
- Lower margin.
- Safer, as you don’t have to store data on any device.
Watching your KPIs going up and down all day isn’t the only way to visualize data. There’re also charts, infographics, and diagrams you can use to better understand your data.
Derived metrics only help you diversify your perspective.
Make The Most Out of Your Data
KPIs and data management are older than you think. Data science just provided us with the technology to access way more data and create all kinds of metrics out of it.
As of today, it’s evident how fundamental it is to use derived metrics for any business that handles a good bunch of data.
And the reasons are clear. Let’s summarize them:
- They’re more actionable and easier to process than dozens of direct metrics.
- They allow you to expand your business intelligence and create better strategies on time.
- They serve as a great way to learn about your customer’s demographics, psychographics, and behaviors.
- They can be used to build predictive models that let you see the future.
- They optimize your dashboards so decision-makers can get a more complete picture of their business performance, in less time.
If your company handles tons of data and you feel like you’re not using it properly, now you know what to do.
Getting business intelligence software is the next step, so you can start gathering data, process it, and track the right KPIs for your business.
So, what are you waiting for? Get started with derived metrics today!
You will also like
About the author
Mark Quadros is a Saas Content Marketer that helps brands create and distribute rad content. On a similar note, Mark loves content and contributes to several authoritative blogs like HubSpot, CoSchedule, Foundr, etc. Connect with him via LinkedIn or Twitter.