Back in July 1976, at the Montreal Olympics, Nadia Comăneci was awarded the first perfect 10 in Olympic gymnastics for her routine on the uneven bars. It is controversial whether an athlete can ever perform ‘perfectly’ but that’s what the judges decided. Ironically, Omega, the provider of Olympic electronic scoreboards had programmed the scoreboard so it could not display a 10, thinking this would never happen. Her score appeared as 1.00!!
When scoring this event, there are four factors the judges consider: difficulty, form, technique, and composition. After awarding scores for these, the judges may deduct points for errors such as pauses, steps on the dismount, falls and so on. At least there is some structure to the scoring system.
We would like our businesses to be “perfect 10’s”, right? For many business owners, that means maximizing revenue or profit or a blend of those. Others, may focus more on enterprise value, especially if they want to sell the business.
Whatever the case, understanding the factors which drive increased revenue / profit / value allows management to focus their time on activities which correlate with success (or even perfection!!)
Here are some factors we consider really important irrespective of your industry, size or goals:
For a business to grow, the customers you are targeting need to be aware of you and then engage with you. At that point they are leads. A large number of high-quality leads positions the business to grow significantly.
Converting opportunities or leads into revenue requires considerable sales skills, sales processes and a competent sales team. High sales conversion of the ‘right’ products to the ‘right’ customers is a major driver of growth.
Average Revenue per Customer
It’s hard to get new customers so when you have them you want to maximize returns (or the Lifetime Value) from the relationship. This happens by ensuring your prices are set appropriately, by offering them the best possible experience and up-selling at every opportunity.
Average Revenue per New Customer
You may have customers you have been working with a long time and they are used to a certain approach and pricing which is difficult to change. But for newly acquired customers you can change your approach, increase prices, bundle products in innovative ways and target customers which will yield a higher average revenue per customer.
Percentage Customer Retention
Simply put, how many customers will remain with you over a period of time? Logically, we’d like this number to be high (i.e. low churn) because the longer you work with customers, the more you can mine them for new revenue opportunities. Also, we tend to get better (more efficient) at working with customers we know which leads to increased profitability.
Reduced Costs of Good Sold (COGS)
COGS refers to the expenses we incur in producing the products we sell. We’d like this to be as low as possible to increase our gross profit and we should look for ways to reduce COGS where possible.
In addition to our costs of production, we incur expenses in running the business such as rent, labor and support services. Reducing these directly helps our bottom line.
Here’s the good news!! The above ‘drivers’ of revenue / profit / value are all NUMBERS. They can be objectively determined by examining the financial statements. Sure, you may have to dig a little but we can quickly establish the current state. The next step is to figure out where to focus your energy going forward.
For example, would you rather attract 5% more leads per annum or reduce COGS by 1%? Or would you rather increase customer retention by 5% or increase sales conversions by 10%? The answers to these questions should drive your business planning. What can be more important than knowing the sensitivity of your business to these changes and then focusing on improvement in one or two select areas?
As accountants, we get excited about providing this direction and have the tools to do so. We like the fact that we can figure out where you are now, where you want to be and then track your progress to get there. Please get in touch to discuss this further.