What Is Benchmarking? How To Set Benchmarks

One way to judge your performance is to compare your business to other organizations. Comparisons with competitors or companies that perform tasks well can help you optimize your work.

This process is known as “benchmarking.” A term originating in land surveying, benchmarking is about measuring metrics and practices and then comparing them with data from other businesses. It’s a strategic tool that saves money, increases efficiency, and highlights ways to gain a competitive edge.

Here, learn about the different types of benchmarking, how to set up benchmarks for your business, and how to track performance against those benchmarks with Shopify.

What is benchmarking?

Benchmarking is when a business uses data to compare its activities to other companies.

Most often, a business will create benchmarks to measure its performance against competitors or other companies engaged in similar activities. However, benchmarking can be performed against any organization with practices that you want to emulate.

You can establish benchmarks for different parts of your business, including teams, products and services, or overall metrics like sales volume and revenue.

Benchmarking produces standards and identifies opportunities for change. As a result of benchmarking, a business might adopt new working practices, engage in restructuring, or alter its sales strategy to improve performance.

Why start benchmarking?

The main reason to create benchmarks for your business is to find areas where your performance falls below the standards other organizations set. Identifying these areas for improvement will help focus your time and resources.

Depending on the data you gather from companies you choose to benchmark against, the process may reveal strategies for closing performance gaps. If you’re benchmarking against direct competitors where data gathering is limited, a strategic planning step is likely required to determine how to respond to benchmarking results.

Benchmarking can help you tweak your product’s features to stay competitive, introduce a new service to capture market share, or switch to a different customer relationship management (CRM) system that’s working well for other businesses.

On the other hand, benchmarking can be used to find places where your business is outperforming the competition. Used in this way, benchmarks can validate your unique value proposition.

For example, benchmarking helps Shopify deliver the world's best-converting online checkout by confirming it outperforms competitors by up to 36%.

5 benefits of the benchmarking process

1. Set data-based goals for departments and individuals
2. Discover and improve inefficient processes
3. Discover and reduce costly overheads
4. Identify small changes to your business that result in big improvements
5. Find and quantify industry-leading aspects of your business

5 types of benchmarking

Benchmarking projects can be categorized depending on their aims and the data you gather. Here are five popular forms of benchmarking:

1. Technical benchmarking

Design teams use technical benchmarking to assess product capabilities and make continual improvements. Let’s say you’re a smartphone manufacturer. Your engineers might compare the battery specifications of your device with those of competitors to create a phone with an industry-leading battery life.

2. Performance benchmarking

Performance benchmarking tells you the health status of your business. It looks at key performance indicators (KPIs), such as email sign-ups or ecommerce conversion rates, to compare current activities to historical business performance and industry standards.

You can also use performance benchmarking to audit your internal reporting. By comparing how KPIs are used across your teams, you may discover which measures of success are most aligned with broader business goals.

3. Competitive benchmarking

Competitive benchmarking compares your business with direct competitors. For instance, if you run a coffee shop, you might compare your sales, menu pricing, or customer satisfaction ratings with another popular coffee shop in your area. The goal is to understand if and why a business is outcompeting you in a specific area—or if you are outperforming competitors.

Difficulties of competitive benchmarking include sourcing sensitive data from direct competitors. In these cases, it may be challenging to understand precisely what competitors are doing to achieve their performance.

4. Strategic benchmarking

Strategic benchmarking is another type of external benchmarking, this time involving non-competitor businesses. In strategic benchmarking, a business seeks to emulate the performance and practices observed in other companies.

For example, you could measure the high-performing marketing campaigns of a clothing brand to gain insights for your SaaS company. Or adopt helpful technology used in other industries, such as when retailers began using Universal Product Codes after noticing their success in the grocery industry.

5. Internal benchmarking

Internal benchmarking is a form of self-evaluation within your business. It involves comparing a team, specific process, or metric from one area of your company to an equivalent team, process, or metric in another area.

Imagine you run a chain of boutique hotels. The front desk of your Miami location receives consistently high customer service scores. In contrast, guests at your New York location don’t rate the front desk team as favorably. Internal benchmarking of metrics such as customer query response times or complaint resolution methods may reveal the cause of the disparity.

At the same time, care should be taken during internal process benchmarking to acknowledge potential variables between comparable processes and teams.

How to benchmark

To benchmark a part of your business, you need quantitative data that accurately represents performance in that area.

You’ll also need access to comparable data from a competitor, another successful business, or your industry to act as your benchmark.

Once you have both data sets, you can analyze how your business meets performance standards. Then, you’ll need to develop a strategy for acting on benchmarking results.

5 steps to create a benchmark

1. Determine what to benchmark
2. Gather internal data
3. Gather benchmark data
4. Set your targets and monitor results
5. Make and monitor changes

1. Determine what to benchmark

Benchmarking works best when focused on a specific element of a role, process, or product. For example, a less effective benchmark for an online apparel store would be overall returning customer rate. In contrast, a more valuable and actionable benchmark would be the percentage of first-time customers who place a second order within 60 days.

Define the scope of your benchmark, including the type of measurement that best defines the product, service, or process. As a business owner, you likely have suspicions about areas of your organization that are failing or exceeding expectations—think of benchmarking as a way to validate those suspicions with quantifiable evidence.

2. Gather internal data

Next, it’s time to collect data from within your organization. This involves breaking down internal processes to calculate performance metrics.

For the apparel store, this could mean pulling 60 day repeat purchase rates from a customer report. You’ll need to select the tools and technologies used for this process, which could range from simple customer surveys to ecommerce analytics.

3. Gather benchmark data

Thirdly, you’ll need to look at the same metrics in comparable businesses to generate your benchmark. Depending on the type of benchmarking, data gathering can take different forms:

• For performance benchmarking, you might want to draw on industry reports or annually published figures, such as return on assets (ROA).
• If you’re creating a strategic benchmark against a non-competing business, you could reach out directly for the information you need.
• In the case of competitor benchmarking, gathering valuable information may be more difficult and require primary market research. For example, the apparel store might sign up for other brands’ email lists and order from them to observe how often (and how soon) those brands re-engage first time buyers.

4. Set your targets and monitor results

Once you’ve collected your external data, define a specific target for your business and bring that target into Shopify. For example, if industry data shows the average returning customer rate for online apparel is 27%, the apparel store could set that as its benchmark. From there, the target report in Shopify Analytics lets you see how you’re trending against that goal on a daily basis at a glance.

5. Make and monitor changes

Benchmarking will point out areas for improvement, but most of the time, it won’t tell you how to address those gaps in performance. The final step in the process is therefore to develop and implement a strategy in response to your results.

If the apparel store finds that repeat purchases within the first 60 days are lagging behind, it might need to invest in better post-purchase emails, build a loyalty program around best selling categories, or revisit its first-order discount strategy.

Learn from the best

Benchmarking is a powerful way to assess the strengths and weaknesses of your business and understand what makes your competition so tough.

By comparing your business to others, you can set realistic goals and find new and efficient methods for achieving them. Remember, the aim of benchmarking is not necessarily to copy what others are doing, but to understand where and how you can improve.