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3 Numbers Every Entrepreneur Must Know

May 7, 2013 2 Comments

3 Numbers Every Entrepreneur must knowBusinesses must make a profit. Even non-profits must bring in more money than they spend to stay in business. To be able to have the greatest likelihood of predictably increasing profit one must understand what drives revenue into one’s business. It is not enough to establish a revenue goal based on a business’s trends. It is critical to understand what actions will increase. This is easier than it might sound if you understand the three variables that impact revenue.

These three variables are the same for every organization, from an independent business owner to a Fortune 500 company. If you understand how these variables are impacted by your efforts, then you can identify the necessary steps to intentionally improve revenue. Without understanding these variables your goals are simply no more than an educated guess. The three variables are your average sale, your number of leads and your average close ratio.

Before we go into more depth on these variables it is important to understand your ability to impact your variables will depend on your business model. Some industries have little ability to impact one or two of their variables, but most will be able to change all of the variables to some degree. For example, most people who go into a restaurant will buy something so the close ratio will be almost 100% for every restaurant, but they can have a huge change in average sales or leads. It is also important you have systems in place to track these variables. If you do not have the capability to do so, it will be crucial that you put those systems in place as soon as you can.

Lets start by explaining each variable. Then we will look at how to use these numbers to understand your revenue.

Average Sale

The average sales could be measured in a few ways. You could measure the gross transaction, the lifetime value of a customer, the net margin of a transaction, etc. Regardless of how you calculate your average sale, it is important to understand what each transaction is worth to your business. While you could break this into business segments as well, it is important to understand and measure all of your transactions for average sales.

Calculate the average sale by totaling all of your sales for a specific date rage and dividing the total by the number of transactions. For example: $1,000,000 / 100 sales= $10,000 average sale. The longer the date range, the more accurate the number.

Activities that positively impact the average sale:

Sales training Additional product offerings
Innovation Pricing
Customer retention Negotiation skills

Number of Leads

The number of leads may be calculated differently depending on your organization. Typically, a new lead is counted when a sales rep successfully makes contact with a prospect. Some organizations may count a lead as someone who has expressed an interest in your offerings after the initial contact. You can measure leads by month, by year, or both. You could also count returning customers as existing leads and track those separately from new leads. New leads and existing leads can be tracked together or separately depending on what makes the most sense for your business model.

Activities that positively impact the number of leads:

Marketing Cold calling
Opportunity tracking Referral strategies
Networking Time management

Close Ratio

Your close ratio is determined by dividing the number of closed sales by the number of leads you processed to get those sales. For example, 40 closed sales / 200 leads = 20% close ratio. You can use any time period to measure this, but the longer the time period the more accurate the percentage.

Activities that positively impact close ratio:

Referral strategies Customer retention
Sales process management Sales training
Objection analysis Communication skills training

By using these variables you will be able to understand how you can reach your revenue goals. Here is an example.

Business: Small Business Consulting
2012 Revenue: $181,311
2013 Revenue Goal: $225,000

2012 Variables

Average Sale

Leads

Close Ratio

Revenue

$13,947

50

30%

$181,311

Now the business must identify how they will impact these three variables to reach the $225,000 goal in 2013. Here is an example of how each variable could get them to the goal.

Average Sale

Leads

Close Ratio

Revenue

$15,000

50

30%

$225,000

$13,947

54

30%

$225,941

$13,947

50

36%

$251,046

As you can see, small adjustments in any one of the variables can help your company to achieve its revenue goals. Once you look at a few scenarios of how you can achieve your revenue goal you can then choose how to impact those variables. For example, if you believe you can increase the number of leads you generate by attending two new trade shows, starting to cold call prospects and asking existing customers for referrals then you can track if you achieve the increased number of leads you had planned on.

The only accurate way to achieve your revenue goals is by understanding what actions will impact your revenue variables. By measuring these variables each month, you will be able to identify if your actions are having the desired results on the variables and thus track the effectiveness of your business decisions relative to revenue generation.

Questions? Comments? Post them below!

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About the Author

Anthony Miller is the Managing Director for Digital Aptitude, a full service digital marketing agency based in Portland, OR. Anthony has spent the last decade training and consulting with small and medium sized business on how to get the most out of their sales and marketing efforts.

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2 thoughts on “3 Numbers Every Entrepreneur Must Know

  1. Several points:
    1. Average is a blunt tool. If your head is in the oven and your feet are in the freezer, averages say you are comfortable. In revenue terms, if you have two a week at $10k and 20 a week at $1k, your average isn’t $5k, it is just under $2k. It may be easier to add more of the smaller sales than the larger ones, or it may make sense to focus on the bigger ones.

    2. Buyers now research online and only contact the vendor 70% of the way through their buying decision. This means that 70% of your buyers aren’t identified yet and your CRM etc. is dangerously inaccurate. How you treat these advanced stage buyers is also different – often the task is to help them unlearn the things they found out from their own research. Or they may be coming to you because the decision is set and all they want to do is beat you down on price.

    3. In the old days the salesperson taught someone in the company the merits of their solution and then that person championed the idea within the organisation. Now everyone can find out enough to be an expert, buying is much more collaborative, with lots of people involved. The sales funnel is no longer linear.

    4. Sell and go is no longer a viable option. Building a business relationship is vital as others will look to your buyer for a recommendation for your company. A single sale also leaves money on the table in terms of ongoing revenues, referrals etc. Monthly fee products are often much more profitable and keep the customer in a relationship with you, closing out others. I changed one company from sale to relationship and trebled profits.

    I hope that adds to the discussion.

    Reply
  2. Thank you for the comments Peter. It would be easy to fill a book with the depth required to understand the complexity of impacting these variables. It is impossible to articulate everything in one article. That being said, here are my thoughts on your points.

    1) I agree that it is a blunt tool on the surface. When you are boiling down revenue generation to three variables it will always be blunt. The numbers are important to drive the exact conversations you are starting. I have worked through this with dozens of businesses and it always begs the questions such as, “do we want lower average sales and more of them or the higher average sales with less transaction?” The correct answer depends on the business and, of course, this could be broken into product categories or even into individual products. Not to mention, most businesses cant answer these questions or havent tried at all. I would hope that you would agree that having the systems in place to measure these variables in a way that makes sense for the business is important.

    2) As a digital marketing agency we couldn’t agree more that understanding your web traffic is critical. We are firm believers that conversion tracking with advanced goals on an action-oriented site is critical. These numbers can be used to accurately articulate how many leads come from your web efforts. For our clients we can predict, with a strong degree of confidence, that $x spent on x marketing effort should result in x leads.

    3) I wouldn’t disagree with this, but that is for B2B transactions. I would also say that it is a matter of sales training to teach your sales reps that process. That will positively impact the close ratio.

    4) This is why you also consider existing leads because we too believe that ongoing business relationship are ideal.

    Thank you again for your feedback and thoughts on the article.

    Reply

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