According to a report by Deloitte, effective KPIs (Key Performance Indicators) can help franchisees identify opportunities to optimize their operations, reduce costs, and increase profitability. But with so many metrics to choose from, knowing where to focus can be overwhelming. If you are a franchisee who has invested in an established franchise business and wants to unlock your business’ true potential, this article will provide you with a comprehensive list of KPIs to track and analyze, to optimize operations, enhance customer relationships, and drive profitability . So, grab a cup of coffee and settle in – it's time to take your franchise business to new heights by mastering the art of tracking and analyzing key performance metrics. Let's dive in!
Understanding KPIs
Key Performance Indicators refer to a set of quantifiable metrics that enable businesses to gauge overall performance in the long-run. KPIs play a critical role in determining the financial, strategic, and operational efficiency of a business in comparison to its competitors. Also referred to as key success indicators, KPIs vary from business to business. KPIs for a fitness chain will be different from a food business and vice-versa. KPIs will also differ from one department to another within an organization.
8 Essential Key Performance Indicators (KPIs) for Franchisees to Track and Analyze
Some of the most important KPIs franchisees should track include:
- Gross sales
One of the essential KPIs for franchisees to consider is Gross Sales. Gross sales, also known as sales revenue, are the cumulative revenue generated from your franchise’s operations over a specific period. This metric directly reflects the overall financial health of your business and can be used to assess the success of promotional efforts, marketing campaigns, and other strategies.
For example, if you witness an increase in your gross sales after running a targeted marketing campaign, you can attribute the campaign’s effectiveness to the growth in revenue.
- Growth rate
The growth rate of a business refers to the variation in its sales performance over a specific timeframe. It’s crucial for franchisees to monitor this metric regularly as it indicates whether their business is expanding, contracting, or maintaining a steady state over a given period. This KPI can also express the annual percentage change in revenue and is advantageous for several reasons, such as predicting a business's future performance and growth potential.
To calculate the growth rate of your franchise business, you can use the following formula:
Growth rate = ((Current value - Initial value) / Initial value) x 100%
For instance, let’s assume you have invested in a franchise business ‘A’ that has increased from $200,000 to $240,000 and your friend has invested in a business ‘B’ that has grown from $700,000 to $820,000.
Then, the growth rate of ‘A’ is 20%, whereas for ‘B’, the growth rate is 17.14%. Even though 20% is larger than 17.14%, an increase of $120,000 is three times greater than an increase of $40,000. Therefore, to determine whether a business continues to grow in the future, it’s important to consider another KPI, i.e Expense described below.
- Expense
Expenses are the costs associated with operating a franchise business such as rent, inventory, employee salaries, utilities, marketing expenses, etc. By monitoring expenses, businesses can easily identify areas where they can cut costs and make adjustments to improve their profitability. Therefore, expenses are said to be a critical KPI to measure as they directly impact the profitability and success of a business.
For franchisees, it's essential to comprehend and handle expenses effectively to enhance cash flow, track progress, sustain a robust bottom line, and make well-informed business choices that align with their immediate and long-term financial objectives.
The formula to determine expenses is:
Expenses = Cost of Goods Sold + Operating Expenses
- Net Promoter Score
Net Promoter Score (NPS) is one of the widely-used metrics that gauges customer loyalty and satisfaction. Customers are asked to rate their likelihood of recommending your franchise to others on a scale of 0 to 10, with scores being categorized into promoters (9-10), passives (7-8), and detractors (0-6). When determining the NPS, the calculation involves deducting the percentage of detractors from the percentage of promoters.
For instance, if 80% of respondents are promoters and 20% are detractors, your NPS would be 60. A high NPS indicates that your customers are satisfied and more likely to promote your franchise to others, fostering organic growth through word-of-mouth marketing.
Formula to calculate Net Promoter Score:
NPS = Total % of detractors - Total % of promoters
- Customer lifetime value (CLV)
As franchisees, Customer Lifetime Value (CLV) is one of the important metrics to track and analyze as it enables you to understand the long-term value of each customer and make informed decisions about allocating resources to retain them. When it comes to calculating CLV, it involves taking into account several factors, including the average transaction or order value (AOV), the purchase frequency, and the length of the customer relationship.
Once these factors are known, it’s easy to calculate CLV by multiplying the AOV by the purchase frequency and the customer lifespan.
Formula to calculate CLV is as follows:
CLV = Average Order Value * No. of Repeat Purchases * Customer Lifespan
For example, if the average order value of your business is $40, the purchase frequency is 5 times per year, and the customer lifespan is 5 years, the CLV would be $1000.
Having an estimate of the total revenue a customer is likely to generate, you can determine the maximum amount you can spend on acquiring a new customer and retaining them.
- Customer acquisition cost (CAC)
Another KPI that you should keep track of is Customer acquisition cost, abbreviated as CAC. It’s the average expense incurred by your business to acquire a new customer. This metric takes into account marketing and sales expenses, as well as any other costs associated with acquiring new customers. By monitoring CAC, you can assess the efficiency of your franchise’s customer acquisition strategies and allocate resources more effectively. For instance, if your franchise's CAC decreases after launching a new marketing campaign l, it signifies that the campaign is cost-effective and should continue to be utilized.
Formula to calculate CAC is as follows:
CAC = Sum of marketing & sales expenses / No. of new customers acquired
- Return on investment (ROI)
Return on Investment (ROI) is a performance metric that evaluates the financial returns generated by investing in a franchise business. When it comes to assessing the profitability of your business decisions you make, such as investing in a new piece of equipment, this metric plays a significant role.
To calculate ROI, you need to subtract the initial investment cost from the net gain (profit/loss) and divide the result by the initial investment cost. For instance, if you invest $50,000 in a marketing campaign that generates a revenue of $70,000, then the ROI for the campaign would be 40%. By tracking ROI, you can make decisions about resource allocations and investments in initiatives to further grow your business.
- Net profit
Net profit is another crucial KPI for franchisees to track because it enables you to evaluate your business’ performance, identify inefficient areas, and make strategic decisions to improve its profitability. It’s the amount of money a franchisee has earned after all expenses incurred, including royalties and other fees paid to the franchisor have been subtracted from the revenue. In other words, it’s the money left over after all costs have been accounted for. By monitoring net profit, you can get a crystal clear picture on the ability of your franchise business to manage expenses, generate revenue, and make profits.
In addition to being a key indicator of your business’ financial health, net profit also affects your ability to reinvest in it, pay off debts, and expand your franchise’s operations. Therefore, you should prioritize monitoring your net profit and take steps to ensure that you’re maximizing your profitability while maintaining the quality and consistency of your franchise operations.
The formula to calculate net profit is:
Net Profit = Revenue Earned - Expenses Incurred
Bottom line
Tracking and analyzing key performance metrics is essential for the success of any business, including franchise. By keeping a close eye on sales, customer, operational, marketing, and financial metrics, franchisees can make data-driven decisions that optimize business performance and drive growth. With a commitment to continuous improvement and a keen understanding of your franchise business’ position in the competitive marketplace, you can stay ahead of the game and ensure long term success.
