Benchmarking in business is crucial for success in today’s highly competitive, global environment. Even if you’re a small business, your competition in many industries these days can often come from anywhere.
What are benchmarks in business?
Benchmarking is business jargon. It means comparing the performance of your business against the performance of your competitors on a range of key success criteria.
What are the types of benchmarking for business?
Business benchmarks can be broadly categorised in two ways:
- Financial versus non-financial benchmarks
Financial benchmarks are business performance measures expressed in dollar terms or via a range of ratios that are based on your business financial statements (such as profitability, liquidity and operating efficiency ratios).
Non-financial benchmarks on the other hand are business performance measures expressed in non-monetary terms, such as customer service standards or the number of faulty products produced.
- External versus internal benchmarks
Business benchmarks can measure external or internal performance.
External benchmarks provide an insight into how your business is performing in the market, such as market share or yearly growth in turnover benchmarks.
Internal benchmarks focus on what goes on inside your business, such as productivity measures or the efficiency of your business processes and procedures.
Examples of business benchmarking
The Australian Taxation Office (ATO) provides a range of financial benchmarks that small businesses can use to measure their performance in relation to their competitors in various industries.
These financial benchmarks are obtained from business tax returns and business activity statements (BAS).
Industry benchmarks that are freely available from the ATO include:
- Annual financial turnover
- Average cost of sales
- Average total expenses
Benchmarking example #1
Suppose you run a small coffee shop with an annual turnover between $65,000 and $250,000.
According to the latest ATO benchmarks for coffee shops:
- The average cost of coffee sales among your competitors is 38% of their turnover.
- The average total expenses of your competitors (i.e., the cost of coffee sales plus all other expenses such as staff wages, electricity and shop rent) is 82% of their turnover.
The Australian Bureau of Statistics (ABS) also provides information that can be used to benchmark business performance across various industries. This information includes:
- Growth or decline in industry earnings
- Growth or decline in industry employment numbers
Benchmarking example #2
If you currently run a retail business, the latest ABS figures show that:
- Retail sales grew by 19.8% in the 2020-2021 financial year (largely driven by a 38.3% increase in online sales).
- Employment numbers in the retail industry grew by 3.8% over the same period.
Why benchmarking is important for small businesses
The overall goal of benchmarking is to find out where you’re currently performing well (so that you can keep doing it and spot new opportunities), and where you have room for improvement.
Areas where you are outperforming your competitors are your competitive advantages.
These can help to attract and retain more customers to ensure your ongoing business success.
One the flip side, areas where you are being outperformed by your competitors are your business vulnerabilities.
If you continue to be outperformed, your business can fail to attract and retain enough customers. In a worst-case scenario, ongoing underperformance can even result in business failure.
How to set benchmarks for any business
The following steps can help you to set benchmarks for your business, regardless of the industry.
Step 1: Determine your key criteria
For example, will you measure:
- Financial performance metrics such as business income and profits
- Non-financial performance metrics such as customer service measures
- External performance metrics such as industry market share
- Internal performance metrics such as staff productivity
Step 2: Identify sources of benchmark information
For example, will you use:
- Australian Taxation Office benchmarks
- Australian Bureau of Statistics benchmarks
- Industry associations that conduct market research to identify performance metrics relevant to your business
- Market research companies who may have already compiled the information you need (or are prepared to compile it for you for a fee)
- Your internal performance records, such as financial statements and information on non-financial measures like staff productivity or customer waiting/delivery times (if available)
Not sure how to begin? Read this post for some guidance.
Step 3: Compile your benchmark source information
This should be a simple process if all the information you need is available from third-party sources like Google Analytics or your own internal records.
However, if there is any information you need that’s not available, then you have a couple of potential options:
- Conduct external market research to get the information you need if possible (or pay a market research company to get it for you)
- Set up internal performance metrics (for example, to monitor your customer waiting/delivery times)
Step 4: Set SMART goals for your business
SMART is an acronym for:
- Specific – the goals you set should be as specific as possible, such as increase sales by 3% next month.
- Measurable – your business performance against the benchmark you’ve selected should be capable of being measured.
- Achievable – any goal you set should be realistic rather than unreachably high.
- Relevant – the benchmark you choose to rate yourself against should be relevant to your business success.
- Time-framed – all goals should have a deadline for achievement.
Step 5: Monitor your business performance
Regularly monitoring your business performance allows you to determine if you’re on track to meet or exceed the benchmarks you have set. It can also help you identify any obstacles that are in your way and to take corrective action if necessary.
The benefits of benchmarking to long-term success
You’ve probably gathered by now that benchmarking does take some time and attention. But the investment pays off by:
- Identifying your competitive strengths and weaknesses so you can capitalise on your strengths and take action to minimise or eliminate your weaknesses
- Defining your market opportunities and threats so you can exploit your opportunities and take action to minimise or eliminate your competitive threats
- Helping you to focus on developing and maintaining competitive advantages
Benchmarking is the process of comparing your business performance against the performance of your competitors on a range of criteria, such as:
- Customer service measures
- Industry market share
- Staff productivity
The Australian Taxation Office, the Australian Bureau of Statistics, industry associations and market research companies provide a range of information you can use to set achievable goals and compare your performance against their competitors.
While improvements may be incremental at first, setting goals that are reasonable and based on data, then using what you learn to improve your products and service are likely to pay off down the track.