Need a Revenue Boost? Try This Simple Formula
You know you need to increase revenue. But write "increase revenue" on your to-do list and I'd be willing to bet that you never get around to it. The problem will defeat you before you ever really get started.
And therein lies your real dilemma: Where do you start? What levers can you pull to bring up your bottom line?
If you'll allow me to make a brief detour back to high school math, I'll show you.
To get your mind around it, here's a simple formula:
(#*%*$)/t ~ Revenue
OK, it doesn't look all that simple, but it is. Let’s break it down:
# = The number of leads you get per month.
% = The conversion rate of deals into transactions. For example, if 100 people call you, and out of those, 10 buy, your conversion rate is 10%.
$ = The average amount you collect from a customer in a single transaction.
t = The average amount of time it takes to close each deal.
~ (squiggly guy) = This symbol indicates a proportional relationship.
Revenue = The amount your sales pipeline generates per month.
What does all of this mean?
If you think back to Algebra class, by increasing variables in the numerator or decreasing variables in the denominator of a fraction, you will end up with a larger number. Also, if you have a number that is proportional to revenue and that number increases, so does your revenue. Therefore, if you can increase #, $, or %, you increase revenues; likewise, if you can decrease t you can increase revenues. Oh, and the really cool thing here is that if you can make very small positive changes to each of these variables you are essentially leveraging the “Compound Effect” as described best by Darren Hardy.
Let’s say you’re a business consultant. You get 40 leads a month, and you sell to two of them. Your average sale is $5,000 and it takes you 10 hours to close a typical deal. Units aside (to simplify), your formula would be (40*5%*5,000)/10 which gives you the magic number of 1,000.
Now, let’s say you increase leads by 10 (25%), improve your closing ratio from 5% to 10%, up your average transaction size from $5,000 to $6,250, and decrease the time you need to close each deal from 10 hours to 7.5 hours (25%). Your magic number is now about 4,167, which translates to a revenue increase of about 400%. The compound effect at work!
So how do you improve each one?
Number of leads – Increasing leads isn't easy. For my Web design business, Ciplex, we focused on making sure that every website we built for our clients included a credit that linked back to us. When people saw the great sites we built and wondered who created them, they had an easy way to contact us. That's just a small opportunity. Depending on your business, you can try a variety of marketing tactics, from trade-shows and traditional advertising, to SEO, PPC, social media, and word-of-mouth marketing.
Conversion rate – Your task here is to get better leads, implement a better prequalification round, optimize your website for conversion, and improve your sales process and pitch. To increase conversion rates at Ciplex, we focused on training our team members to improve their product knowledge. Instead of sales people, they became consultants, working with the client to determine the best solution for their business. Clients loved that and we saw our conversion rate jump as a result.
Average deal size – Can you improve your product quality, sell more in a transaction, or try introducing higher ticket items into your product/service package? Be careful with this one as it doesn’t always make sense to raise your prices. We left this one out at Ciplex, as we wanted to stay competitive, and the market didn't give us much room to increase pricing.
Average time to close a deal – There's no substitute for great salespeople and empowering them with great systems, tools, knowledge, and processes to get the job done right. Just as we saw our conversion rate increase when we focused on training our team, we also saw the average time to close a deal go down.
The end goal is to break down revenue generation into specific, quantifiable action items. By making very small changes to each variable you can compound growth in your revenue streams and increase the throughput of deals through your pipeline. Once you get your revenue to where you want it, your focus should shift to maximizing profit margins (without sacrificing qualify) to truly scale your business.