As of today…is your business growing, or dying? (This technically applies to our personal lives, too.) Dying doesn’t sound good to me. I’d rather be growing. That’s why I focus on constantly growing and getting better at what I do in every aspect of my life.
I teach the same to my clients. In some cases, clients need to do an about-face to get their organization back in the “growing” rather than “dying” category. (See this Journal of Corporate Renewal article where I was part of a round table discussing a business turnaround for an example.)
I remember talking with one of my clients about growing his $50mm energy services company. These guys process about 14,000 invoices per month with an average invoice ticket of approximately $300. How would a company like this continue to grow?
The only way to grow any business is to grow the number of customers, increase the average sales value, and/or increase the frequency of customer purchase. That’s it.
The key is to focus on improving each component.
I have used this simple formula with many types of companies including medical practices, construction companies, HVAC companies, truck parts distributors, job shop manufacturers, and technology resellers. It’s a simple formula and it works.
Once you understand the power of this, it will help really grow your business.
Consider the following formula.
Number of customers x Average sale price x Frequency of purchase per year = Revenue
I put together a program for one of my client’s segment and had some amazing results.
|Number of customers||1,000||1,226|
|x Average sale price||400||456|
|x Frequency of purchase per year||7||7.5|
Notice the geometric growth – a 22% increase in number of customers and 14% increase in average sales with small increase in frequency of purchase gives a 50% increase in revenue.
For the energy service company I was speaking to, we outlined a small increase in the number of customers 7% based on current growth trends and an additional service offering to increase the ASP $100 as follows:
|Number of customers||14,000||15,000||7%|
|x Average sale price||300||400||33%|
|x Frequency of purchase per year||12||12||0%|
I suggest you look back at the prior 12 months of sales and get your actual numbers. Don’t make assumptions here. Most business owners I talk to make assumptions as to the number of customers they have and ASP, but when we get the actual numbers, their assumptions invariably are wrong. Dump your invoice register to excel. De-dup the customers or compare to sales by customer. I also like to calculate average invoice value (total sales divided by total number of invoices). This may be be an easier stat for your sales reps to focus on.
TIP – I love the simple trick in Excel to de-dup a list (data menu, remove duplicates), then use the sumif formula to get totals. I use this trick all the time.
Once you have your actual historical data, develop creative strategies and ideas to increase each element of the growth formula. Then EXECUTE a couple strategies and measure the results. Optimize, then repeat; test and measure.
It’s the only way to grow your business. Customers x ASP x purchase frequency = revenue.