There are only five areas you need to act on to grow a business. That’s right, only five. And you need to do them simultaneously. This basic formula is available all over the internet, but there are tons of business owners that still don’t know about it – and don’t realize how powerful it is.
What are those five areas?
- LEADS (prospects or potential customers)
- CONVERSION RATE (the difference between those that could have bought and those that did)
- NUMBER OF TRANSACTIONS (the average number of times each customer bought from you)
- AVERAGE DOLLAR SALE PRICE (the average price of the items you sell)
- MARGINS (the difference between the cost of goods and the price you sold it for, shown as a percentage)
What do they affect?
- CUSTOMERS (the people who decide to buy from you)
- TOTAL REVENUE (the total sales income of the business)
- GROSS PROFIT (the amount of money left over after costs of goods are paid)
Here is the formula:
Leads X Conversion Rate = Customers X # of Transactions X Average $ Sale Price = Total Revenue X Margin = GROSS PROFIT
A very small increase in these 5 areas can have a significant impact on your bottom line. Here’s an example:
Tom owns a service business and he feels like he’s working extremely hard at not making very much money. Together, we review his past 6 months’ worth of sales and this is what we find – on average, Tom has about 50 leads each month but only turns about 12 into customers. They buy from him one time in a 6 month period. His average sale is $250 and his average margin is 60% after he pays for his supplies and his service helper.
50 leads X 25% conversion rate = 12 new customers X 1 transaction X $250 average sale = $3,000 revenue X 60% margin = $1,800 gross profit
Tom decides he needs some help and decides to take a class, or hire a business coach/consultant or work a few hours in the evening learning something new. He realizes that making the RIGHT small changes can make a big impact. So, let’s say Tom determines to increase EACH of these 5 areas by 10%:
- 50 leads to 55 leads
- 25% conversion rate to 35% conversion rate
- 1 transaction to 1.5 transactions
- $250 average sale to $275 average sale
- 60% margin to 70% margin
55 leads X 30% conversions = 19 new customers X 1.5 transactions X $275 average sale = $7,838 gross sales X 70% margin = $5,487 gross profit
By improving each of these 5 areas by a small amount, the resulting increase in gross profit is significant. While it is always preferable to improve on all 5 areas simultaneously, focusing on even two or three and then adding the others will make a tremendous difference in your bottom line.
Be on the look out for tips to improve each of these areas!