Be an Ethical Entrepreneur, Marketer, and Business Builder

How to fix your business FAST – Part 2 – Know your numbers!

The world lives and dies by numbers. Granted I am an engineer by education so I may be a little bias…

Even more importantly, the world gets answers to questions by the correct numbers. If you’re looking at the wrong numbers, you’re never getting answers to your questions. Let me give you a quick analogy. In the world of internal combustion engine building we’re all looking for a few major numbers – namely horsepower and torque. So we hook an engine up to a dynamometer (a device that measures the power output of an engine) and now we know the horsepower and torque numbers. So what? How do I improve those? Well to do that you have to look at a lot of other numbers such as bore and stroke, number of cylinders, 2 or 4-strokes per cycle, manifold pressure, air-to-fuel ratios, cam lift and duration, ignition timing… And the list goes on and on and on… Without knowing how that engine is currently configured, I can’t possibly tell you what to “fix” to help it make more power.

Your business has 3 “big” numbers, they are # of customers, revenue and profit.  Those are your horsepower and torque. All they tell you is where you’re at right at this moment. They don’t tell me how we got there or how we’re going to make more power (profit) the next time around. Even if you don’t know a single thing about engines, I’m hoping that analogy makes sense. The bottom line is, you have to know your numbers and they have to be the CORRECT numbers.

Let’s break your numbers down into a few basic categories (you’ll notice these are the same as I reference when talking about the 3 leaders every business needs):

  1. Finance/Accounting
  2. Sales/Marketing
  3. Service/Operations

Finance/Accounting – These are the numbers you get from your bookkeeper.

  1. Profit & Loss
  2. Balance Sheet
  3. Current Receivables (along with the aging)
  4. Current Payables (along with the aging)
  5. Cash in the bank

These are the numbers that provide questions, but no answers. Your bookkeeper only knows enough to start asking a few questions. Things like,

  • “I see you spent $40,000 last year on marketing, what was your return on that?”
  • “Your cell phone bills average $115/person, have you shopped around for a cheaper plan?”
  • “You have $6,000/year in Meals & Entertainment, is that necessary or can that be cut back?”
  • “It appears that sales are down 20% but costs are only down 10%, why is that?”
  • “15% of your receivables are more than 60 days past due, what are you doing to collect money?”

As you can see, none of the reports under Finance/Accounting provide any answers except maybe to the question, “Do we have enough money to cover next payroll?” That doesn’t mean we don’t look at these numbers because this is where we measure the results. If we add a turbocharger to an engine, ultimately we want to see that reflected in higher horsepower and torque. The same is true for your business.

To start answering the questions about why your business has less customers, less revenues, and less profits, you need to use Brad Sugar’s business chassis. Buy his book Instant Cashflow, learn the chassis, and use it. You can also learn about the business chassis on Brad’s blog.

Sales/Marketing – Now we’re getting into the fun stuff. Here’s a quick list of the numbers you should know in this realm:

  1. Number of New Leads (daily or weekly, though some establishments will even look at this by the hour of day)
  2. Conversion Rate (i.e. the % of leads who become customers)
  3. Number of New Customers (how many people have bought from you?)
  4. Average Dollar Sale (revenue/total # of transactions)
  5. Average # of Times a Customer Purchases from you Each Year (total # of transactions/total number of customers)
  6. Cost per Lead (for each marketing project)
  7. Cost per Sale (for each marketing project)

Do you see where we’re going with this? If our sales are down, now I can pinpoint if it’s because we’re getting less leads, converting less leads to customers, selling a lower dollar amount per transaction, and/or because our customers aren’t coming back as often. Now we’re getting somewhere! With these numbers you’ll even be able to pinpoint that you’re getting less leads because that radio ad you started 6 months ago is no longer making the phone ring. In the next few blogs, when I get to the step about Improving Marketing and Sales, we’ll look at specific ways to improve each of the numbers above.

Service/Operations – This is your back-end. Once you’ve sold a product, this is how you deliver it, service it, restock inventory, order more inventory, schedule service, and everything else that’s in essence “behind the scenes”. The important numbers for Service/Operations can vary quite a bit from industry to industry however the concepts are the same so make the proper adjustments for your industry.

  1. Profit per income generating person – this could be per plumber, electrician, waitress, sales associate, barista or anything else. If a person on your team has the ability to generate income, you need to know this number.
  2. Income per income generating person – this is important because often these individuals have more control over the income they generate than the costs they incur. That doesn’t mean their choices don’t affect the costs of the business, I’m just saying that a plumber can’t much affect the cost of gas or the distance to his job or the markup for parts or the hourly rate.
  3. Turn-over – how long does it take between buying something for inventory and selling it. Car dealerships look at “average days on lot”, retail stores look at “average day on shelves”, service-based businesses might look at “number of days from inquiry to finished service.”
  4. Profit-margins – In other words, the mark-up of each product or service. If you’re a service-based business you need to determine the cost/hour for your billable people to determine your profit-margins.
  5. Customer Complaints – You might be surprised how close your customer complaints as a % of customers served mimics your net profits.
  6. Uncompleted Work – For retail or restaurant style businesses you don’t really have an equivalent for this. People walk into your business, they buy something, you provide it immediately, and your work is done. For service-based businesses, however, this information is crucial. If work isn’t getting done, or you’re getting behind, or customers aren’t being notified of delays, you’re going to have problems. You need to know how many outstanding work orders, quotes, and return phone calls are out there so they don’t ever slip through the cracks.
  7. Free Work – This means you screwed up an order and gave someone a free meal, or a free hour of labor, or a free part, or a free legal consultation, or you had to go back to their home or business to fix a problem you didn’t fix the first time. You screwed up and had to make amends and the cheapest way to do so was to do it for free.
  8. Daily, Weekly, and Monthly Break-Even – In other words, do you know exactly how much you need to sell today, this week, and this month to break-even. Some businesses will even break this down to per shift if there are multiple shifts within a day.
  9. Lost Customers – Since my blogs have talked quite a bit about recurring revenue, you need to have a very close watch over your recurring revenue customers. If one of them calls to cancel services, you better have someone trained to try and save that account. This is almost impossible to track if you have a retail style business.

Those are your numbers. Obviously there can be more, however those are the most universal and the ones I’d look at for just about every business from a law firm to a candy store to a hospital.

To your “number-knowing” success, Bryan

P.S. If you’re wondering how you track all of these numbers, the simple answer is with industry-specific software. If you don’t have any, make it a priority to purchase or lease some right away.

Scientific Advertising

I finally finished Scientific Advertising by Claude C. Hopkins this past weekend and HIGHLY recommend it. The whole book is around 75 pages and can easily be read in a little over an hour.

There are 2 primary concepts that literally jumped out at me as I was reading. The first blindingly simple, yet profound, teaching of Claude C. Hopkins is simply:

“Your object in all advertising is to BUY new customers at a price which pays a profit.”

Did you hear that?

Just like when you go out to buy a car, or parts, or insurance or anything else for your business you expect (even demand) to get something in return for your money, your marketing is no different.

If you’re not verifying that your marketing is cost-effectively buying you new customers, then you are most likely just throwing money away.

The second point that Claude makes is really just a further clarification of the above statement. On the last page he highlights the fact that pretty soon all advertising agencies will only get paid based on the results they deliver.

Is that how you pay your advertising agency?

“The time is fast coming when men who spend money are going to know what they get. (hahaha, if only that were true in marketing today) Good business and efficiency will be applied to advertising. Men and methods will be measured by the known returns, and only competent men can survive… Enormous advertising is being done along scientific lines… We (advertising agencies) shall be prouder of it (advertising) when we are judged on merit.”

Does that describe your advertising agency?

Now it may be fair to assume that with the advent of new tracking methods such as Pay-Per-Click, Click-Thru-Rates, custom 800 numbers for each direct mail piece, etc. etc. that advertising agencies are indeed moving in that direction.

I would tend to agree, except… Scientific Advertising was published in 1932!

Now do you see why it’s so important to understand the concepts of “Scientific Advertising” that he promotes? For 80 years we’ve been able to track the results of our advertising dollars in terms of the cost/lead and cost/sale and yet we still aren’t demanding that from our advertising agencies (or from ourselves if we handle our own marketing).

It seems to me, however, that times may be changing.

Yesterday I was speaking with a gentleman who does sets primarily for TV commercials. He’s done it for over 30 years and has done sets for commercials, movies, TV shows, and music videos and so seems to have quite a range of experience.

In his personal opinion, TV advertising rates have dropped off so much over the last few years he imagines it will nearly disappear entirely within the next few.

Obviously I questioned him on that, but he insisted that, whether it’s simply a byproduct of the economy or not has not been proven yet, but if not, TV commercials are on the way out. Could that be because businesses are finally demanding results from their marketing or dropping it altogether?

In practical terms, this is how you hold your advertising agency’s feet to the fire.

  1. Track the following:
    1. Cost of advertisement
    2. Number of people who inquired because of it
    3. Number of people who purchased because of it
    4. Lifetime value of each customer
    5. Profit Margins
  2. Calculate the following:
    1. Cost of advertisement/number of people who purchased because of it – This gives you your “cost/sale”
    2. Lifetime value of customer x Profit Margins – This gives you the profit you’ll make off of each customer or “profit/customer”
  3. Compare the following: your “cost/sale” to “profit/customer” – If the “cost/sale” is higher than “profit/customer” drop that marketing project or figure out a way to improve it in a jiffy.

Let’s throw in a few numbers to make the point clearer.

  • Cost of advertisement: $1000
  • Number of people who inquired because of it: 10
  • Number of people who purchased because of it: 4
  • Lifetime value of customer: $2000
  • Profit Margings: 15%
  • Cost/Lead = $1000/10 or $100
  • Cost/Sale = $1000/4 or $250
  • Profit/Customer = $2000x.15 or $300
  • Our Profit/Customer ($300) is greater than our Cost/Sale ($250) so we keep the marketing

Keep in mind that you should always be improving your marketing to be more cost-effective.

In other words, even though we’ll make $50 profit on that advertising program, if we can improve our marketing or sales process to increase the number of people who purchased based on the same advertisement to 5 (an increase of 25%) our profit would double (increase of 100%) to $100 per customer.

To get some practical ideas on how you can better track your lead sources to determine your cost/lead and cost/sale be sure to check out my blog about why Asking your customer “how did you hear about us?” is a waste of time and what to do about it…

To your Scientific Advertising success, Bryan

How to increase your conversion rate by 10% in the next 30 days…

No matter what business you’re in, if people have to buy something from you, there is a sales process. If that process involves them walking past your store or entering, that’s a step in the process. If it involves them browsing through stock or trying things on, those are steps. The following material was used as a bit of an educational marketing piece for a company I worked for but it applies to every business everywhere. 🙂

 

No matter what you’re selling there is a step-by-step process that takes place from initial contact to completed install. Each step in the process presents an area where you can be losing prospects who are ready and willing to pay you, but unfortunately you haven’t done the best job of helping them learn that!

 

Here’s the idea. There are 3 main areas to improve in your sales process:

  1. The script

  2. The person

  3. The system (i.e. are we following up? are our materials effective?)

 

And each of those areas can potentially be improved for each step in your sales process… So if you’re sales process has 6 steps, then there are possibly 18 different areas you can improve. If that doesn’t make sense, don’t stop reading yet!

 

Unfortunately,

the ONLY way to determine your weak areas AND make an educated decision on how to improve them is through detailed tracking for at least 2-4 weeks.

 

Ultimately you should be tracking every lead with this level of detail FOREVER to make sure no weak-links pop-up down the road.

 

So here’s my 8 step process for plugging those holes and increasing your closing ratios to the best they’ve ever been in the next 30 days.

  1. Write out the steps in your sales process. From the initial phone call, email, or trade show contact to the post-install request for referrals write down every single step. Your steps may look something like this:

    1. Initial Contact: Telemarketing, Call-in, incoming email, fair/trade show sign-up

    2. Call-back: Phone call to set appointment, Email response to inquiry

    3. Confirm: Call to confirm.

    4. Appointment: In-home presentation

    5. Follow-up:

    6. Schedule Install

    7. Install:

  2. Write down the possible results for each step. “Cancel” is NOT a specific enough result. It’s better than nothing, but the goal is to determine “Why did they Cancel?” and address that issue. For instance:

    1. Initial Contact: We’ll call you back, Too expensive, Just gathering information, Appointment Set

    2. Call-back: Call me back later, I’ll call you once I check with my spouse/mom/dog, Too expensive, Appointment Set

    3. Confirm: X was here yesterday and we’re going to go with them, Too expensive, An emergency came up, We’ll be home and waiting!

    4. Appointment: Too expensive, Have to ask my spouse/mom/dog, Think we’re just going to go with X instead, I don’t think we need that right now, Sounds great sign me up.

    5. Follow-up: Credit was turned down, Sign us up!, Check Bounced, Credit Card denied, We changed our mind.

    6. Schedule Install: If you are losing leads at this step, look at the time from the previous step to the install date. You may need to look at working non-standard hours to get installs taken care of right away.

    7. Install: Looks and works great!, Emergency came up and we can’t be home, We changed our mind

  3. Make a flowchart of the steps. The flowchart is very helpful for showing everyone each step and to help you to setup your software for tracking. Notice that all of the items above in italics are reasons a step becomes a dead lead. All of the other results from above are what leads to the next step. Reference the Sales Flowchart example below:

    1. They sign up and you have to get “Credit Approval”
    2. They sign up and pay with cash, a check, or credit card so you “Schedule the Install”

    3. You have to “Follow-up” with them

    4. They’re not interested and it becomes a “Dead Lead”

  4. Example Sales Flowchart

    Notice how it can get a bit tricky. If you look at the “Appointment” step you have 4 options:

  5. Make a list of all of your lead sources. If you’re going to put all this effort into tracking your leads you might as well track the lead source to answer 3 questions:

    1. Did that lead source pay for itself with after sale profits?

    2. What is the acquisition cost of that lead/customer? (maybe it paid for itself but other sources have a lower acquisition cost and therefore generate better profits)

    3. Are there any steps in our sales process where we’re losing a lot of people from this source?

  6. Track every lead. If you have to, funnel every lead through a specific “Sales Coordinator” in your office or be sure to train everyone. Just make sure your tracking everything – Including those referrals that are going directly to your sales representatives. At a minimum, you NEED to track the following information for each lead:

    1. Name

    2. Phone or email (you need to be able to contact them somehow)

    3. Person in your office who spoke with the prospect (this is the only way to determine if your weak link is a person)

    4. How they heard about you (i.e. lead source)

    5. If they’re no longer interested, WHY NOT? If you believe you have a great product that you KNOW will help them you should be shocked that they’re no longer interested and ask.

  7. Make sure EVERY lead gets input into a spreadsheet or database so you can get quick/accurate results on each lead. This is where simple to use database can make huge improvements in your business! Let’s face it, the first 4 steps are relatively easy. You’re a responsible and effective owner or sales manager and you can put the steps, results, and flow chart together. However the people in your office who are tracking lead information may not be quite as dedicated as you… Therefore the process MUST be simple to track and input. Moreover, since you’re already wearing 10 hats, its very important that managing this process is simple for you. 🙂

  8. Analyze the data. Determine the weak step (i.e. from step #1). You determine the weak step by looking at the step prior to it becoming a “Dead Lead.” For instance, if after the initial “Call-back” they say they’re not interested, your weak step was the “Initial Contact” and/or the “Call back”. Now to determine the weak link (script, person, system) you have to look at the REASON they became a dead lead. Not Interested will never tell you the weak link! Too expensive, husband says our water is fine, we already bought from X competitor, are reasons that allow you to start addressing the weak link. Obviously, you also need to record which person handled the “Initial Contact” and which person handled the “Call-back” to determine if it’s a people-problem.

  9. Plug the hole. Improve the weak link. How do you do that? Simple. You make a change, test it for the next few weeks and measure the results. Be careful to only make ONE CHANGE AT A TIME PER STEP or else you won’t know which change made the difference. Your change may be additional training for the person, improvements to the script, or a better method for tracking follow-up within your sales process.

  10.  

    Rinse and Repeat. Once you stop tracking each lead your closing ratio starts to go down immediately.

To your success, Bryan