Recently I was at a workshop led by a couple business coaches and they put forth a formula for building business that I hadn’t seen in the 10 or so years that I’ve been in marketing. This formula breaks down piece by piece the key to profits:
(((# of Leads x Conversion Percentage) x Avg No. of Transactions) x Avg Dollar Sale) x Margin Percentage = Profit
Now for those of you who don’t remember your high school algebra (and I had to struggle a bit to remember myself), start from the inside parentheses and work your way out. Like this:
First multiply the Number of Leads x Conversion Percentage
Ask yourself how many leads you’re bringing in on a monthly basis (whether it’s through sales people, lead services, etc). For conversations sake, we’ll say 200.
Now ask yourself what percent of those leads you actually close on a monthly basis. Don’t high ball it, if anything, go lower. For the sake of this conversation, we’ll use a 10% conversion rate.
Multiplying these two numbers gives you the number of new customers you bring in every month. With our 200 leads per month at a 10% conversion rate, we’re bringing in 20 new customers every month.
Now multiply that by the Average Number of Transactions per Customer
If each customer is buying an average of five widgets from XYZ Corp, then on a monthly basis, you’re completing 100 transactions.
Now that you have an idea of, on average, how many transactions your company is processing each month,multiply that number by the Average Dollar Sale and you have your monthly revenue.
So, based on our 100 monthly transactions, if each one was an average of $1,000, you’re looking at $100,000 in revenue per month.
Finally, multiply that revenue by your Margin Percentage and you have your profits.
$100,000 per month is a great sales number but remember you have to pay your sales people, your rent, for production, etc. If you have relatively low overhead, you might get to keep most of that. If your margins are lower…well you get the picture.
For the sake of this conversation, we’ll say that you have a 50% margin.
So that brings our grand total to $50,000 per month in profit!
Now a lot of you are probably reading this and thinking “thanks, Captain Obvious, I’m pretty sure I could’ve figured that out on my own,” but you’d be surprised at how many business owners have simply never thought about it.
Now think about this: If you could increase each one of those variables by 5% what would that do to your bottom line? Do that math and let’s talk about ways to make it happen.