Numbers That Count - Part Two
Following on from Part One, here are some more tricks you can use to make great decisions.
Total Market Size = How large is the market? This is about the maximum number of people that could be interested in our product/service.
“There are 4,000 people who live and work within 500 metres of our café” or
“There are 20,000 people in our city who are passionately against bottled water”
% Market Share = What proportion of the market could/have we captured?
“We believe we can realistically serve 20% of that market” or
“There’s a lot of competition, so we might only get 3% of those customers”
Expected Market Size = Total Market Size x % Market Share.
This tells us how many customers we can expect (often as a maximum).
If we want more, we need to grow the market, or steal customers away from our competitors.
“We can therefore expect to sell to 600 customers in the first year”
# Purchases per customer = How many items does one customer need/want to buy in a given time period.
This helps us calculate the maximum number of sales to expect.
“We expect that our 800 regular customers tend to come in twice a week, so that’s up to 1,600 total visits on an average week.”
Average Sale Price = How much a customer spends while they’re with you.
This tells us how lucrative each customer is, and which types of products are proving to be popular.
“Customers average $4.50 per person, which is probably one coffee each, plus a quarter of them buy a muffin”
Total expected sales = # Purchases x Average Sale Price.
This tells us how much revenue we can expect to see.
“If we expect 1,600 purchases per week, at an average of $4.50 each, then we can anticipate a revenue stream of $7,200 per week.”
Here’s what’s so important about those metrics.
You might have guessed that a business of this size could do $7,000 in sales each week, and you would be right.
That doesn’t actually empower you to make good decisions.
What you need is to be able to see how each part of the chain worked in order to make that amount.
That’s why the terminology is so important.
If you don’t have a term for something, how can you be expected to measure and improve it?
How do we improve the figure?
Most social enterprises want more revenue, so they think the answer is “Sell more”.
That’s technically correct, but a useless thing to tell your team.
Let’s get specific:
You can grow the pie.
Get more people to be interested in what you’re selling.
Maybe you target a new customer segment, or start widening your advertising.
You can work on increasing your share of the market.
This would be about testing, measuring and changing your pitch, based on what leads to a sale.
It could also mean luring customers away from competitors, through a better product, a discount or another incentive.
You can increase the number of purchases per customer.
This could be through loyalty programs, or by solving another customer problem.
Maybe it’s how you treat your regulars, or through how frequently you communicate with them, keeping on the front of their minds.
Lastly, you can work on increasing your average sale price.
Maybe that’s through a price rise, maybe it’s through a price drop if that leads to customers buying more items from you.
It could be through cross-selling, pitching additional products that they don’t normally consider, or through discounted combos/packages.
See how much freedom you have here?
You get to choose which of those will have the most impact for your business, and have some clear, concrete starting points.
This is how you crank up revenue; slowly at first, but methodically work through your options for how you grow.
Above all, keep an eye on your numbers, and you’ll be able to make great decisions.
This is a four-part series on useful financial metrics.
You can jump straight to:
Part One Introduction, Margins and Breakevens
Part Three Customer Value, Acquisition and Retention
Part Four Churn Rate and Customer Behaviour
You might enjoy my four-part series on building your first financial model.
You can go straight to:
Part One: What is a Financial Model?
Part Two: What does a Financial Model do for me?
Part Three: Building the skeleton of the Model
Part Four: Tips & Traps