Running through your business is a chassis. The way you build your business around this chassis dictates what your business will look like. It’s a bit like the old beetle and Porsche 911. They had the same basic chassis, but the cars they build around them were quite different – I think you’d agree. It’s the same with the Jaguar X-type and the Ford Mondeo.
So let’s take a look at the basic chassis running through every business and some ways to build your business into a Porsche or Jaguar, rather than a Beetle or a Mondeo.
The business chassis is made up of five component parts. These are the five things that all businesses should have in common:
- number of leads
- conversion rate (number of sales divided by number of leads)
- average number of transaction (total transactions divided by number of unique customers)
- average sale value (£)
- average profit margins.
The exciting thing is that most business owners don’t know the numbers associated to any of these five areas even though they are a critical part to running any business. Exciting because, just by starting to make measurements in these areas in your business you can make a huge improvement.
Let’s first examine “why” these areas are so critical to your business. These five components are called the Business Chassis because your entire business “runs” on these components. No business operates without them. These are fundamental. And, when you consider them as a maths equation, they represent the fundamental math that leads to business growth and success or business failure and death.
Here’s the maths.
A. Number of Leads Generated X Conversion Rate = Number of New Customers.
If you intend to add more customers, you must do at least one of two things. You must increase your number of new leads (those who are aware that your business exists) or increase your effectiveness in converting those leads into customers. Both can be done but both require specific strategies to make your efforts effective and productive.
B. Number of Customers X Number of Transactions (the frequency of purchase) X Average £ Sale = Total Sales.
Once you know your total number of customers, then you can multiply that number by their average purchase frequency to get the total number of transactions you should expect in a period. Then, multiplying that number by the average ticket price for a sale and you get the total revenues generated during that period.
If you want to increase your revenues, you must either increase the frequency of purchase of your existing customers or get them to buy more each time they visit with you. Again, both are achievable but both will require different strategies to get the results you want. Focusing your strategies on your very specific Business Chassis goals is a critical part of success.
C. Total Revenues (£) X Average Profit Margin = Total Profit (£)
If you want to increase the profitability of your business, then you must find ways to improve your profit margins so that you make additional margin dollars on each and every transaction. Again, there are several strategies that will work to make this happen. You simply must decide what you are going to accomplish and implement the strategies in a focused manner.
This may not be the way you traditionally look at your business. But here is where the magic comes in. Because each one of these measures is multiplied, we magnify the result. In other words, since each component is multiplied by the others, even a small change in each component can result in a large change in the bottom line profit.
For example, a 10% increase in each of the 5 components of the Business Chassis will result in a 61% increase in the bottom line profits! Small improvements focused on each of these five areas will have a dramatic increase in your business. Sound too good to be true? It is real- trust me!
This is a POWERFUL concept that most business owners overlook. Simply understanding how the math equation works is game-changing. Then taking the time to develop the specific strategies to use to make the improvement happen can change the future course of your business.
What specific strategies can you identify to improve each of the five areas discussed here?
- How can you generate more leads: new marketing or improving your current marketing or both?
- How can you convert more of them into sales? Do you have a sales process? Do you have sales scripts? Do you follow up? Do you have a dedicated sales team? Do they all do the same thing? Who gets the best results? Why?
- How can you get people to come back?
- How can you encourage customers to buy more in a way that helps them to enjoy their purchases and value your service more.
- How can you increase your overall profit margins? Lower costs, increase prices, improve your product lines and customer base?