“Why did my sales decrease/increase?”
“I want to grow sales by X%…what do I do?”
“What levers do I have to grow sales?
What’s the one thing in common with these frequently asked questions from small business owners? Yes, they’re usually signs of confusion and frustration but that’s not it. They’re focused on a result, or outcome: revenue.
When we want a different outcome, what must change? The inputs!
In this article we will talk about:
1. How revenue is simply an outcome resulting from inputs (actions in the business).
2. What data business owners should be looking at, and taking action on, to change revenue outcomes.
3. How to use the data to plan for and predict revenue (rather than hope for revenue).
After reading this article you should be less confused about how to create the revenue you need to support your profit goals.
There’s four main concepts to discuss, let’s get started!
Concept #1: Revenue is an outcome.
Revenue is an outcome, or a lagging indicator. You don’t know about it until it’s already happened.
Business owners can be confused or frustrated by revenue because they’re hoping for the outcome they want, without a plan to get there.
To eliminate this confusion and frustration we need to understand HOW to create revenue. When we understand how to create it, we can also explain it.
No, creating revenue is not as simple as “go sell more”. That’s a non-specific action leading to a non-specific outcome. Enter revenue drivers…
Concept #2: There are 5 ‘drivers’ of revenue.
If revenue is an outcome, how is the outcome created?
We measure the following 5 numbers, or revenue drivers (leading indicators), to explain and predict revenue. The beautiful thing about them is they can be displayed in a simple formula to show how revenue occurred and what you can do to change it in the future.
To put this another way, if you want to grow revenue, one or more of these 5 numbers must change. Everything you do in your business to grow revenue starts with these numbers.
These numbers are simply indicators of success (or failure) for functions of your business…marketing, sales, operations, etc.
Note: Every single business has these drivers. You might call them something different and some may be bigger ‘levers’ than others, but I can assure you that you have them.
Driver 1 – Leads
What is a lead? Simply put, it’s an opportunity to sell to a new customer. Where you start tracking a ‘lead’ in your pipeline is something you have to decide and we won’t go into that in this article. If you’re a marketing agency a lead could be discovery calls booked or proposals given or something else.
The point is, decide what it is and start tracking it.
The first number you can change to grow revenue is leads.
Driver 2 – Conversion Rate
This is more straightforward because it’s math. Your conversion rate is the percentage of leads who turn into paying customers. If you had 10 leads last month and 5 became customers, it’s 5/10 = 50% conversion rate.
The second number you can change to grow revenue is conversion rate. The more leads you convert, the more paying customers you have.
Driver 3 – Retention Rate
Every year, or month if you bill customers monthly, you start with a number of customers you’ve previously sold to. Let’s say it’s 1,000 coming into 2022.
If you sell to 400 of those 1,000 prior year customers, your retention rate is 400/1,000 = 40%.
The third number you can change to grow revenue is retention rate. The more prior customers you sell to, the more active customers you have this year.
Driver 4 – Customer Purchase Frequency
How often, on average, do your customers buy from you? Using the marketing agency example, if you have retainers in place, hopefully this number is close to 12. Now on average it won’t be as high as you think due to customers onboarding and offboarding but it should be up close to it.
To calculate the average customer purchase frequency you divide your total number of sale transactions by total number of customers (new plus retained) who purchased in the given year.
The fourth number you can change to grow revenue is customer purchase frequency.
To show an example of this revenue driver in everyday use we can all relate to…you know those emails you get from companies you’ve purchased from this year? The ones tempting you with sales, discount codes and limited time offers to come back and buy again? They’re attempting to increase their customer purchase frequency.
Driver 5 – Average Purchase Value
If you divide your total revenue by the total number of sales transactions, you will get your average purchase value. This is the average amount a customer spends when they buy from your business.
When you’re shopping on Amazon and you see the ‘Buy it with’ section, this is put in place to increase their average purchase value.
When your weed control company asks if you want to upgrade from the ‘silver’ package to ‘gold’, they’re increasing their average purchase value.
The 5th and final number you can change to grow revenue is average purchase value.
Concept #3: Use the drivers to predict revenue and improve your business.
If you do nothing else with this information, begin tracking each of these drivers and ask yourself, “what can I do in my business to improve this number?”
Better yet, first ask yourself if you need to improve the number.
As business owners we are quick to think we need more leads or more new customers to achieve our goals. Maybe, but unless you know your revenue drivers you don’t know that answer.
As said earlier, these drivers are simply success indicators for key areas of your business. Behind each revenue driver is a business function, strategy or tactic. It’s something the business owner, or team, can put their hands on and fix/improve.
It’s marketing. It’s sales. It’s how you onboard a new customer. It’s how well you provide the service or product the customer buys. It’s how you price. The list goes on and on.
Maybe you need to simply convert more of the leads you already have.
Maybe your retention rate is declining and you need to discover why so you can work more on keeping existing customers rather than finding new ones.
Maybe you need to increase your pricing or do a better job reminding existing customers to come back and buy again.
The answers are in your revenue drivers and if you don’t know or measure them, you cannot arrive at data-driven answers.
Concept #4: The revenue driver formula.
So now that you know what drives revenue and how to change it, let’s review the formula. You can also think of this as a revenue map…how you go from $X to $Y. Here it is with some example data:
Here’s how it works:
Leads (driver 1) times Conversion Rate (driver 2) gives you total new customers.
Prior customers times Retention Rate (driver 3) gives you total retained customers.
New customers plus retained customers gives you total customers who purchase.
Total customers who purchase times Customer Purchase Frequency (driver 4) gives you a total number of purchases.
Total number of purchases times Average Purchase Value (driver 5) gives you total Revenue.
Wrapping it up…
Whew, that’s a lot of information but it’s imperative for a small business owner to understand it and be able to track this data.
Once you have an understanding of your revenue drivers and how to impact them, you will feel like you’ve gained a new superpower – we’ve yet to run across a small business owner who wouldn’t agree. This is part of the journey to start acting like the ‘Queen Bee’ of your business.
Here’s the takeaways from this article:
1. Revenue is an outcome, it’s not something you take direct action on.
2. You change revenue by changing a revenue driver. Revenue drivers are impacted by marketing, sales, operations, customer service, etc.
3. Revenue drivers should be tracked and used to decide what a business should focus on in order to grow its revenue. ***Bonus points if they’re used to develop a sales plan.***
4. The revenue driver formula can be used to explain past revenue and predict future revenue.
QUESTIONS??? Post them in the comment section below!