Getting your KPIs right can mean the difference between success and failure. Jesper Borulf and Gabriel Nelsson Vedung share which KPIs they’re tracking in luxury essentials brand CDLP’s finance team, and why they’re so important.
If you’d like to hear more from Jesper and Gabriel, our CFO Ruben Arnbert spoke with them about international expansion, their tech stack, the importance of communication and, of course, their favourite Excel shortcut in the first episode of Beyond the Balance Sheet.
More KPIs doesn’t always equal more control. While it can be beneficial to keep an eye on multiple data sources, you shouldn’t overdo it when it comes to your KPI tracking.
“In the earlier days, we had this massive KPI dashboard that we built to run the business. We realised that it got way too complex,” says Jesper. “Over time, we had to trim it down substantially. Now today, we are looking at maybe the top three or four KPIs.”
Collecting and processing a lot of information to gain insights can take up valuable time. This complexity can make it more difficult to know which actions to prioritise once you have those insights. Instead, keep it simple with fewer KPIs to focus on the metrics that matter.
“CAC obviously is the main one in the online channel,” says Jesper. “CAC is more sudden in a way. You have to react to it if you see changes in the various markets.”
“Historically, as we prioritise growth, we look at a CLV (customer lifetime value) over CAC ratio which has been very good,” says Gabriel. “Cash is king right now, we want to keep our coffers tight.”
Optimising CAC is an important step to reaching profitability. Prioritising CAC guides your decision-making on marketing spend and other acquisition costs. For CDLP, this means looking at the profitability of a customer now instead of taking a gamble on potential profitability down the line.
“We simply just stay at profitability. Currently, if they’re not profitable at first purchase we cut it off,” says Gabriel.
This approach maximises both CAC and CLV: if a customer is profitable now, it’s worth spending to encourage repeat purchases. If not, don’t spend on them.
In comparison to the immediacy of CAC, retention is a more long-term KPI.
“Retention is a little bit longer in, further down the road, but you need to keep an eye on that as well, per market, to ensure the lifetime value (LTV) increase,” says Jesper.
Retention brings returning customer revenue. Tracking retention and how the customer funnel looks for different cohorts can bring valuable insights to inform your inventory and marketing strategy.
Gabriel gives this example: “If we see that a customer buys a pair of underwear first, then goes into t-shirts and that leads to retention and CLV, then we instruct the rest of our organisation to pivot and focus on this now. This means in turn, buy more t-shirts because we’re going to be marketing more t-shirts for this cohort.”
This example shows how important it is to bring together insights from across the business to give more depth to your metrics. Not only are CDLP tracking retention, but they’re digging deeper to discover why customers return, and how to leverage this information to grow LTV.
“Cost of sale is also up there,” says Jesper. “Marketing spend divided by online revenue.”
Your cost of sale will have a direct impact on your gross profit. It’s important to use this KPI and work with your marketing team to ensure you’re hitting your targets.
“I would say a shifting cost of sale of 2 to 3 percentage points, will set off the alarm bells in the finance team, and then we go and speak to the marketing guys and see what's going on,” says Jesper.
Gabriel agrees. “It's really good then to have this granular approach because, for example, you can instantly see we're at 22% now – we're supposed to be at 18%. What went wrong last week? We saw that the algorithm pushed sales into this market where we obviously didn't get any customers, cut it off, modify the algorithm, train it again.”
With many marketing campaigns using automation, it’s important to know where you’re spending and learn from your data to optimise your strategy. Measuring cost of sale is especially important for seasonal businesses as it won’t be consistent: it can be easy to overspend on marketing in both low and peak seasons for different reasons. Leveraging cost of sale, especially if you have historic data, can help find the balance between spend and sales.
It’s important to be reactive to any changes in CAC, retention and cost of sale. With less KPIs to measure, it’s easier to track your metrics and dig into the data to yield actionable insights.
“Another important [KPI] these days is inventory coverage, per SKU or per product company,” says Gabriel.
Inventory coverage tells you how much stock you've got. Not only is this important for making sure you don’t accidentally sell out, but it also gives valuable insight into what is and isn’t working. This will directly influence your inventory management strategy and marketing decisions to ensure healthy cash flow.
“See which products are not performing,” says Gabriel. “Which products do we just get rid of right now via a sale just to keep having that cash buffer at all times? It’s paramount to do so in these times.”
“GM3… is a very important KPI that we also look at,” says Gabriel. Gross Margin 3 (GM3) - a measure of your net profit margin. GM3 gives your net profitability after all costs, both direct and indirect. This will show how efficient you are as a business.
Cost of sale and CAC go hand in hand with GM3. So, by tracking them you already have some of the metrics needed to understand your net profit margin.
Our CFO Ruben suggests that runway is another KPI that’s top of mind for finance teams. In a recovering economic climate, it’s important to maximise your runway and ensure healthy cash flow.
Jesper agrees: “Cash flow projections are absolutely essential in our business, and to have enough cash buffer to manage uncertainty, especially in a year like 2024, is very important.”
Tracking your runway consistently will allow you to take action early if you need to optimise your expenses.
As your business expands to other markets, scaling your KPI management can feel challenging. Jesper suggests breaking it down by country.
“You have to run the company like small mini-companies in these countries. So, the US is one company, the UK is another one, Sweden is another one,” says Jesper. “They all have their separate models, which then of course consolidates up into the total. But, when we look at the finances, it is very much a country-by-country analysis.”
A country-by-country analysis enables you to make decisions specific to each market. But, this will scale the amount of data you need to manage. This is another benefit of keeping the number of KPIs low – it’s easier to track them across a growing number of markets.
Less is definitely more when it comes to KPIs. By saving time and minimising complexity, you can get actionable insights faster. This means you can be reactive to any changes, and make informed decisions to guide your business to growth.
By centralising your spend management with a solution like Juni, you can have the insights you need to inform your KPIs. Juni is business banking, spend management, financing, and accounting on one powerful platform and app.
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