Businesses 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.
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