Do you know these 4 numbers for your business?
As in all games, the game of business requires us to keep score. There’s a host of financial and non-financial numbers we can measure and monitor. Sometimes this can take a little imagination.Measuring results is relatively straightforward but if our results aren’t what we want, the causes of those poor results will have happened some time ago.Finding indicative activity measures might be harder but will act as an early warning system. Measuring ‘prospect calls made’ might become a more valuable measure than ‘sales’.
Whilst it’s possible to become distracted from our main aim by too much analysis, it’s also possible to be at the opposite extreme and measure nothing. “I’m not good with numbers” is a poor excuse – put in the effort to become acceptable. Nor is “it’s difficult to measure” an acceptable excuse – get thinking and find a way.
Here are a few interesting numbers that (I think) are important.
Life Time Value (LTV)
Simply, on average, how much gross profit does a client contribute over their lifetime?
If a client buys from us every 3 months, spends on average £100 and is a client for 5 years, they spend in total £2,000 (12/3 x £100 x 5). If our gross margin is 50%, their LTV is £2,000 x 50% = £1,000.
This number reminds us how much a client is worth to us. It allows us to answer questions such as how much would we be willing to invest to keep them for an extra year? (Anything less than £200). And how much would we invest to ‘buy’ a client? (Technically, anything less than £1,000. However, for a 12-month payback, anything less than £200.) You can’t complete a marketing plan without knowing LTV (in my opinion).
Prospect Conversion Rate
At its simplest level how many enquiries turn into paying customers. For every 10 enquiries, if we convert 1 of them our conversion rate is 10%. If we convert all 10 them our conversion rate is 100%.
100% might sound brilliant but it may suggest that we’re undervaluing our service and we need to put our prices up until our conversion rate drops to 80%!
By contrast, 10% might sound disastrous. However, it represents a huge potential to improve and grow. Improving on 90% is hard; improving on 10% is very achievable. Take 1 in 10 to 2 in 10 and we’ve just doubled our business.
Everyone understands conversion rate, as it’s pretty straightforward. However, the reality is that not many people measure and interrogate it. If we don’t know what it is, its difficult improve it.
What £ value do we put on our time? The answer is it depends on what we’re doing. If we’re engaged in improving our conversion rate from 10% to 20% then it could be thousands of £ per hour. If we’re doing our own book keeping it could be £20 per hour. If we’re clearing up the brew room (because no one else does) it could be £8 per hour. If we drive to and from (60 minutes) a network meeting (90 minutes) and follow up afterwards (60 minutes), how do we value that investment of 3½ hours? As a bare minimum I recommend a £1 per minute i.e. £210. Or perhaps the same rate your solicitor might charge i.e. circa £700. Putting a value on that time suggests we should get a financial return on our investment. Again, unless we measure it we won’t know whether or not networking is a good investment of our time.
A difficult measure – but probably the best ‘headlight’ measure of future success.
The best system (in my opinion) is Gallup’s simple 12-question survey. They’ve carried out millions of employee surveys around the world for decades and have developed a model that strongly correlates their measure of engagement and organisational results. Over that time they’ve refined their surveys down to 12 specifically worded questions. Surveys can be completed online at Gallup’s Q12
The questions are answered on a 5-point scale and are in a hierarchy (scoring highly on later questions does not make up for poor scores on the earlier questions). Here are the first 2 questions:
- I know what is expected of me at work.
- I have the materials and equipment I need to my job right.
Over the years I’ve found that just working on getting high scores on these 2 questions has a huge impact on an organisation.