Measuring to Manage Growth in Profitability - Part 2
If we want to gain long term sustainable profitable growth we need to measure not only what has happened but activities we are now undertaking that will generate results in the future. So what are future performance KPI’s?
While the Historical Financial performance is critical information, many businesses fail to effectively measure the extensive activities undertaken before a sale is achieved.
This often requires the additional measurement and reporting of KPI’s of Future Performance on a daily and weekly basis and when undertaken effectively provides a very reliable window to future sales and marketing activities. The following pipeline measurements should be evaluated for relevance to your business.
Future Performance KPI’s
1. Cash Flow
As mentioned in part 1, prepare a cash flow forecast for at least three, preferably twelve months in advance. It should be updated regularly (no less than monthly and preferably weekly).
2. Conversion Rate
This is the number of sales calls, visitors or customers you need to see to make one sale.
For example, if you have to contact 10 sales prospects (on average) to make 1 sale you will have a conversion rate of 1 in 10.
If you have a retail store, measure how many customers come in each day vs. how many sales you make. If you have 100 customers per day come in and make 20 sales you have a 2 in 10 conversion rate.
If you receive enquiries by website, measure how many hits per day you receive and also how many sales you make from them. If you get 80 hits per day and make 40 sales you have a 5 in 10 conversion rate.
The higher the conversion rate, the better your selling system is working. Measure the conversion rate by sales person and see who is getting the highest conversion rates. Then study what they do. Why do they convert sales at a higher rate? Do they have a better selling script? Do they counter objections better? Are they more consistent? Friendlier? Write down the system they use and use this to train your sales team. Consistently try to improve your conversion rate by finding a sales system that works – and stick to it until you find something better!
A note on conversion rate – some businesses think that 1 in 10 is bad. If your rate is around this level think how easy it is going to be to double your income. All you need to do is convert 2 out of 10. If however, your conversion rate is much higher (say 7 out of 10) you will not be able to double your income from working on this area alone.
That doesn’t mean you shouldn’t try to get the number higher but you will have to make efforts in other areas too. If this is the case you might also like to think about your pricing. Perhaps your conversion rate is too high because your pricing is too low.
Remember competing on price alone is the hardest way, if a competitor comes in with a lower price you’re out of the game!
3. Number of Times a Customer Buys From You
If your customers buy on credit terms, this should be straightforward to measure. If not, develop a mechanism for measuring this. Then think of strategies to get them in the door more often (customer loyalty programmes, competitions and privileged client club are a few).
Social media can be used inexpensively to invite them to participate in special offers, closed door sales, time of year sales, birthday discounts, etc. Stay in contact with your customers. The more often you do, the more often they will buy from you.
4. Average Dollar Sale
It’s critical that you measure how much (on average) your customers spend with you. Remember to measure this by customer (not by sale) as some customers may buy from you more than once in a day, week or month depending on your business.
Strategies like customer loyalty programmes are great for raising this figure easily and can have increased effect on your bottom line.
5. Number of Customers
How many customers do you have? Consistently measure how many customers your business serves by day, week and month. This will tell you your slow periods and indicate when you should increase marketing. Always look at how you’re spending your marketing dollars. Reallocate advertising money (if it’s not performing) to customer referral programmes, endorsement campaigns and other more concentrated campaigns.
6. Marketing 'Measure Everything You Do'
You should know exactly how many customers respond to any marketing effort and how much they buy as a result. Every ad, direct marketing campaign or promotion should have some measurement mechanism – a coupon, a code to quote, a free gift; something so that you know how the customer came to buy.
Then work out whether each marketing effort is working for you or costing you. If one is not performing either try another format, different wording, different offers, etc or dump it and allocate your marketing dollars elsewhere.
A very important point to remember: understand the lifetime value of a customer. That is, how much they are likely to spend with you in the long run. It can be quite acceptable to make losses initially if it provides you with a new customer that will deliver solid long-term gains.
If you produce products in a factory, it is important that measurements are put in place to ensure the efficient operation of the plant. These KPI’s need to cover not only the operation of the production floor but also the planning for both capacity and material along with the ordering of material and sub assemblies, stock recording, material issues and customer delivery.
Measuring exactly what is happening in your business enables you to play with numbers and see what would happen if you achieved increases in each area.
A five percent increase in conversion rate, average sale value and frequency can easily turn into a 25% improvement in profitability.
Owning a business is a high risk. Measuring all the KPI’s listed in this paper reduces the risk and stress on the owner(s).
Measurement is the path to profitable growth of your business and the increase in the value of your investment.
Missed Part 1?
Head to Measuring to Manage Growth in Profitability Part 1, which covers Historical Performance KPI's;
Debtor Payment Ratio
Stock Turn and Levels
Working Capital Cycle
Performance to Budget
Industry Comparatives & Benchmarks
Period Comparison of Financial Performance