What makes a business successful? About 50 percent of small businesses fail within the first year of business. A business can fail for many reasons. Some of them are the lack of understanding of prospects, conversions, lifetime customer value, profit margins, retention and their effects on business.
Prospects - How many prospects can you get and how fast? You can measure this on a monthly, quarterly and yearly basis. The keyword here is measure. You must know and measure the total number of prospects you are receiving. Most business owners have no idea how many leads they receive. It is like flying blind.
Not only that you have to know the number of prospects, but you have to understand the source. For example, if you get most of your prospects from a business networking group you have to think of ways to scale it. Whatever time and money you invest into leads should be measured for results. If you have been running radio ads and they don’t result in leads you should invest your money in other marketing channels that work for you.
Conversion - What percentage of your prospects become customers? If you receive 100 prospects in a month, you have to know how many become paying customers. You have to understand your conversion rate in order to make improvements. If you had a 30% conversion rate in the previous year and this year it is at 20% you have to investigate the possible causes. If you have no idea of your conversion rate, you won’t be able to improve.
To take it a step further you should understand what lead sources give you the highest conversion rate. For example, your website might only provide you with 30 percent of your prospects, but the conversion rate might be double than any other lead source. You should always try increasing your conversion rate. A ten percent conversion rate increase could result in a ten percent revenue increase without having to increase the number of prospects.
Transactions - How many transactions does your business have? A transaction is mostly a sale or a new project or a new account. Are the transactions repeat business or one of. The most successful companies rely on repeat business for growth. Does your customer buy from you daily, weekly, monthly, quarterly, or yearly? Can you increase the frequency of their orders? How do you stay in touch with your customers to remind them of services/products they should know about?
Value of customer - Do you know what is the average order size? How much does your average customer spends with your business? If your business relies on repeat business, how much does a client spends with you in a year? Beyond that, what is the lifetime value of a new customer? If your average customer stays with your firm for 5 years, and they spend $5,000 per year, the average lifetime value of your customers is $25,000. It is essential to understand the lifetime value of your customer in order to accurately budget for marketing. It might cost you $5,000 to acquire a new customer which sounds like a lot of money until you consider that they will bring $25,000 revenue.
Retention - If you have a business with repeat customers, you have to understand your retention. There is no such a thing as 100% retention, but you always want to be as close to it as possible. Increasing your client retention rate by as little as ten percent can have a huge impact on your profitability. Know the number. Our average client retention is X. Don’t allow yourself to use terms like good or great. You should know the exact percentage of your clients that stay with you for a year, two years, three, years, so on and so forth.
Profit - No, you can’t make it up by volume. If you are not profitable you will go out of business. You have to know what percentage of every sale is profit. Don’t be satisfied with statements like “We are very profitable.” Your profit margin is a number. If you are contracted for a $5,000 project and $2,500 was profit, then you’ve got a 50 percent margin. Your profit margin excludes your costs and expenses. You can grow your business with the same number of clients, if you can increase your profit margin.
Let’s look at what we have been looking at with some numbers:
100 Prospects x 20% Conversion = 20 Clients
Average sales in first year per client = $5,000 = Revenue first year = $100,000
Lifetime value of client = $25,000 = Revenue by end of 5 yr period = $500,000
Profit margin = 50% = $50,000 (1st year) $250,000 (by 5th year)
A 15 percent increase in prospects could result in 23 Clients, increasing your first year revenue to $115,000 and $575,00 (5 year). If you could also increase your conversion rate to 30 percent, you would have 34.5 new clients with revenue of $172,500 (1st year) and $862,500 (5 year).
You can model with different number of prospects, conversion rates, average sales, lifetime customer values, and profit margins. You can continually strive to improve your bottom line if you pay attention to a few key factors listed above. Even single digit increases can have a huge impact on your business.