Know What You're Benchmarking
Benchmarks Are Important
Business owners have long been advised to “benchmark” to gain a sense of how their business is performing. Benchmarking is comparing performance metrics from your business to past performance and to other, comparable businesses. What this looks like in practice is taking a metric like profit margin and comparing it to your company’s profit margin over time: did it go up or down, by how much, and why? And then looking at your industry’s average for profit margin and asking are we higher or lower and why? In general, this will give you a sense of if your business is doing good or bad and is it getting better or worse.
But, Benchmarks Should Be Ignored
Unfortunately, by using only historical performance and industry averages as benchmarks, you miss the opportunity to be an outlier, to grow and improve dramatically, and to otherwise set your company apart from the industry by finding and creating new markets that may not have set benchmarks.
The industry average profit margin in food service is 5.5%. If my company achieved 6% last year and 7.2% this year, we are doing good and getting better when compared to our benchmarks. But what if we could have a profit margin of 15% if we made a few investments in new technology and started to diversify our customer base in a way that no other companies in our space are doing? Then is it fair to still use our historical record and the industry average as a benchmark? If 15% is the possibility then 6% last year and 7.2% this year is not very good performance.
Historical performance and industry averages do provide some useful context for assessing your business’s performance; in particular it should always raise a red flag if any meaningful metric that you track is worse from year to year. Additionally, you never want to perform worse than the rest of the industry.
Historical performance and industry averages should not be considered benchmarks therefore, they should be considered minimum acceptable performance targets.