The Only Business Metric That Matters

If you've been in business for more than 15 minutes, you've likely encountered a seemingly endless list of performance metrics, or Key Performance Indicators (KPIs). While these numbers are meant to provide insights, they can also distort reality. The truth is, every metric—when presented in the right way—can tell a misleading story.

The Vanity Metric Trap

We've all heard entrepreneurs and executives brag about their company’s headcount, as if a larger payroll automatically means a thriving business. In reality, high payroll costs don’t necessarily indicate success—just more expenses.

Even more deceptive are commonly celebrated metrics like conversion rates, Return on Ad Spend (ROAS), or net income. Consider these scenarios:

• A 12% website conversion rate sounds impressive—until you realize the company only has 100 visitors per month.
• A ROAS of 8.5 seems extraordinary—until you see that the company has a -35% net margin, meaning they aren’t spending enough on ads to cover their bloated cost structure.
• A $1 million annual net income may seem strong—until you realize the company generates $750 million in revenue, meaning their net margin is just 0.1%.

Without context, these numbers are meaningless. But there is one metric that cuts through the noise.

The Only Metric That Matters: Contribution Margin (a.k.a. Happy Dollars)

If you truly want to understand your business’s financial health, the magic metric you need is contribution margin—or happy dollars.

Happy dollars are what’s left over after you subtract all the direct costs of generating revenue, such as:

• Cost of Goods Sold (COGS)
• Credit card processing fees
• Shipping and fulfillment
• Marketing and advertising expenses

These are known as variable expenses—they scale up or down with revenue. The more you sell, the more you spend on these costs. The less you sell, the less you spend.

Happy dollars represent the cash available to cover fixed expenses like payroll, rent, legal fees, insurance, and other overhead costs. If happy dollars exceed fixed expenses, the business is profitable. If they don’t, you’re losing money.

Why Happy Dollars Matter

If you change your marketing strategy, increase ad spend, or switch agencies, the most important question is: Are happy dollars increasing or decreasing over time?

• If happy dollars are increasing, your changes are working, and the additional revenue contributes directly to profit (as long as fixed expenses stay in check).
• If happy dollars are decreasing, something is wrong, and you need to make adjustments—fast.

This is the real way to measure business performance, not surface-level KPIs that only tell part of the story.

Tracking Happy Dollars Accurately

To make smart business decisions, you must track happy dollars consistently over time. The challenge? Contribution margin calculations can get complex. Instead of manually crunching numbers in spreadsheets, use a system or software to automate the process—just ensure it’s accurate.

Final Thought: Focus on What Matters

All metrics are vanity metrics without context—except for happy dollars. If you want a single, reliable way to gauge business success, contribution margin is it. Increase your happy dollars, keep fixed expenses in check, and your bottom line will take care of itself.