Decisions in today’s business world are almost always powered by analytics. Modern businesses have access to an unfathomable amount of data, which stems from both internal and external sources. The companies that can successfully interpret and act on this data have a massive leg up on companies that can’t. Accordingly, many companies are willing to pay top dollar for qualified professionals who can help them make sense of the billions of data bits swirling throughout the economy.
Let’s examine how businesses can leverage analytics to help them reach their end goal — growing profits.
How Can Analytics Increase Revenue?
Data analytics is the process of analyzing large and complex data sets to extract insights that can inform business decisions. This data can come from internal sources like customer behavior or website traffic. But, it can also come from external sources like competitor data, economic data or social media data.
There are three main ways that businesses can leverage analytics to increase their revenue:
- Optimize operations: Analytics are commonly used to manage the supply chain, inventory levels or production process. By recording and analyzing different metrics involved in these processes, companies can eliminate bottlenecks and maximize profit. For example, many companies will analyze past sales data to identify when customers are most likely to buy certain products. Then, they can adjust their inventory levels accordingly so they have just enough product to meet demand, without being overstocked.
- Improve the customer experience: Analytics can record customer behavior and offer a more personalized experience. By tracking certain customers’ behavior over time, companies can offer the right promotions to the right customer at the right time to get the best results.
- Enhance sales and marketing: There are dozens of ways that analytics can be used within sales and marketing. A few examples include designing better-targeted campaigns, testing more frequently and doubling down on what works. Even one marketing campaign, such as a newsletter campaign, will offer dozens of different analytics like open rate, click-through rate, conversion and more. The marketing team must then digest this data so it can improve the next campaign.
But, with so many different analytics to keep track of, how do companies know where to start?
What Are the Most Vital Analytics?
According to Kevin Payne, there are three types of analytics that are so vital that every company should keep track of them:
- Sales: This goes further than simply recording how many products you sell. Sales analytics involves looking for long-term trends to help uncover new opportunities, identify underperforming channels and determine when and how to adjust each channel for maximum success.
- Inventory: For companies that sell physical products, it’s crucial to keep track of inventory at every stage of the process. By doing so, you can identify bottlenecks and remove them.
- Customer: This set of analytics monitors how your customers act before and after making a purchase. McKinsey estimates that companies that employ customer analytics in their marketing strategies get 23 times more customers than their competitors. A common example is running a re-engagement campaign to offer a promotion to a customer who put a product in their cart but then abandoned it.
With all that said, analytics are just numbers and ratios. They aren’t valuable until a business executive can use them to draw a conclusion and draft a narrative that will help the company. To do this, the business executive must understand how analytics can impact a company’s profitability.
Understanding Profit Margin Ratios
There are many ways to measure a company’s profitability. Most commonly, companies will look at several metrics to understand how the company is performing. Looking at just one metric — even net income — doesn’t always show the whole picture.
To better understand a company’s profitability, investors will use three different profit margin ratios:
- Gross profit margin: how much profit a company makes on its cost of sales. Measured by the equation: Gross Profit Margin = (Sales – Cost of Goods Sold)/Sales
- Operating profit margin: Examines earnings before interest and taxes compared to sales to determine how successful a company’s management has been at generating income from the operation of the business. Measured by the equation: Operating Profit Margin = EBIT/Sales
- Net profit margin: Compares net income to sales and is the most effective way to sum up how effectively managers run a business. Measured by the equation: Net Profit Margins = Net Profits After Taxes/Sales
Each of these equations tell a slightly different story and can offer insight into how the business performs. To learn more about the role that analytics play in impacting a company’s profitability, many aspiring business professionals will earn a Master of Business Administration. Particularly, they choose a program that specializes in accounting or analytics.
For example, Eastern Washington University (EWU) offers an Master of Professional Accounting (MPACC) in Business Analysis Reporting online program that covers all aspects of business accounting, analytics and reporting. Students can expect to learn leadership and managerial decision-making skills that will help them excel in public, private and nonprofit sectors. Students can complete this program in as few as eight months.
Learn more about EWU’s online MPACC in Business Analysis and Reporting program.