Chapter 2
What’s your business growth goal for the next 12 months? Is it 5%, 10% or even 15%?
The British Track Cycling team managed to achieve an ambitious goal by making lots of small improvements. This strategy can also be applied to the task of growing a business. Here’s how.
Your business cycle can be broken down into 7 Key elements:
1. Lead Generation
Lead generation refers to the number of new enquiries your business generates from advertising and other marketing activities. You cannot create a customer or client without first attracting the attention of someone who is interested in your product or service (we call them prospects), so all of your marketing must be focused on getting new enquiries.
The bad news is that lead generation is (often) the most difficult and most expensive of the 7 Keys — it’s generally cheaper to sell more to existing customers — however any serious scale up strategy must include customer acquisition. Note that lead generation does not include enquires from customer referrals, which are dealt with separately in Key #6.
2. Conversion Rate
This is the percentage of leads that you convert into paying customers. Lead generation and conversion are like two peas in a pod, because if you succeed in generating enquiries but fail to convert a reasonable percentage of them into customers, then your marketing investment is being wasted.
Big gains can be made in terms of revenue growth by improving the conversion rate, and the cost is usually quite small, because you’ve already invested the money to attract prospects who are interested in your product or service.
3. Transaction Value
The average value of each sale or invoice is the third Key. The bigger this figure is, the higher your sales revenue, plain and simple. There are lots of creative ways to increase this metric, and retailers such as supermarkets and fast food restaurants, are masters at this, and you can borrow some of their strategies and use them to good effect in nearly any business.
4. Transaction Frequency
The fourth Key is the frequency with which your customers do business with you. It’s easier and cheaper to get existing customers to buy from you again, because you already know who they are and that they’re interested in your product or service. That’s why businesses of all types employ a range of techniques to lure you back to them, such as vouchers and coupons, special offers, new releases or new lines, and so on.
5. Profit Margin
The amount your business earns, after deducting the costs of selling and operations, is its profit margin. With this fifth key we move from focusing only on revenue, to looking at the bottom line — or what’s left in your business after paying your suppliers, staff and other providers.
It’s often said that revenue is vanity, profit is sanity: while you can compromise on profitability for a short period of time — and you may need to do so during a period of high growth — a business that consistently fails to make a profit has a very uncertain future.
6. Referrals
Referrals are new customers that do business with you as a result of a recommendation from your existing customer base. This is a subset of lead generation, but it’s a separate Key because of the different strategies and techniques that you will use. I mentioned that lead generation can be difficult and expensive: not so with customer referrals. They come to you without necessarily having seen any of your advertising and they are already primed from the best marketing that money can’t buy: an endorsement from and independent source whom they trust!
7. Client Retention
Finally, the seventh Key is Client Retention, and it’s here that you take all of the good work that you’ve done by improving the other six keys — more customers, higher revenue, increased profits — and turn that into long-term business value.
Let’s suppose that you have an ambition to sell your business in the future. Well, there are many factors that will determine the valuation, or the price the buyer is willing to pay, including fixed assets, brand loyalty, business systems, etc. But, at the end of the day, the value of a business is determined by its ability to generate future profits. I’ll say that again, the amount the buyer is willing to pay for your business is based solely on the income they expect it to generate in the future.
All of the assets on your balance sheet, whether tangible or intangible, have value only because they enable the business to generate profits.
The most valuable asset in your business might be your customer list, but only if you can succeed in getting them to keep buying from you year after year.
In summary, these are the Seven Keys, and each of these is explained in more detail in the following chapters. Substantial growth can be achieved by making improvements to the average of each of these Keys.
Of course, there are other processes and operations that are important to the success of your business, such as research and development, procurement, recruitment and financing, and we’ll touch on some of these throughout this course. But these are the key factors that can influence the growth of your business and its long-term value.
The final element of the Seven Keys Formula is Systemisation, which is a broad term that covers a range of supporting systems, processes and structures that are necessary to ensure that your business maintains quality and makes a profit.
Chances are that over the short life of your business you’ve been so focused on winning new business, keeping your customers happy and clearing the overdraft that you have not worried too much about efficiency. But if your business depends on you in order to function, this can be a massive barrier to the kind of growth that you desire.
Systemisation means automating what can be automated, outsourcing what can be outsourced and ensuring that the remaining tasks are performed as efficiently and effectively as possible. We’ll talk more about this in Chapter 5.