Chapter 3
Let’s move on and talk about how you can use the Seven Keys Formula to scale up your business. In the previous chapter I told you the story of British Cycling Team and how they achieved near total dominance in the sport: not through big, ground-breaking improvements, but by targeting incremental gains in many areas.
Applying this to business, the areas you need to focus on are the Seven Keys. Let’s illustrate how making modest, manageable increases to each of these metrics can have a dramatic impact on the revenue, profits and overall value of your business.
Suppose that in the last year, a business received 2,000 leads per year from all of its marketing and advertising activities, and the Conversion Rate was 30% so they won 600 new customers. And suppose further that the average transaction value was £300 and the transaction frequency was 2, giving sales of £360,000.
If the overall profit margin was 50%, this resulted in a profit of £180,000. But the business also got 200 referrals and another £60,000 profit. So, total profit for the year from these new customers was £240,000.
The business expects to keep those customers for an average of three years each, so the lifetime value of those customers is £720,000. If the value of a business is determined by its ability to generate future profits then Customer Lifetime Value is a key indicator of the value of your business.
Because we don’t know anything else about this fictional company, we are going to use Customer Lifetime Value as a proxy for underlying business value.
These figures are illustrated in the box on the next page.
Next, let’s look at the impact of adding just 10% to each Key.
Annual profit has gone up by 57% and Customer Lifetime Value has increased by 73%!
Do you think that a 10% increase in each Key is a realistic target? If your business is still quite small but you have the capacity to scale up, you may be able to achieve even higher increases for some of the Seven Keys. I see a lot of businesses that are, for example, undercharging for their services, aren’t trying hard enough to win repeat business, or setting their cost base higher than it should be.
In the example outlined above the business started off with a Customer Lifetime Value of £720,000, and the 10% increase in each Key boosted that to £1.25m. So if the business increased each Key by 20%, for example, it would triple the value of the business. A 50% target for each Key would increase the value of the business tenfold.
But of course, that kind of growth is not achievable or even desirable in one year; so let’s look at what happens if you continue making modest improvements to each of the Seven Keys over the next few years. In the example we have used, a target of 10% increases business value by 73% in the first year. If the business achieves that again in the second year, it will have tripled in size, from 720,000 to over £2m (see table below).
If the business does it again in year three, it will be five times the size it was at the start, and by the end of year four, nearly nine times the size.
And that’s how you build a £10m business.
Of course, the illustration only looked at new customers. Hopefully you have a bank of loyal and satisfied customers who are coming back year after year, or if they’re not, whom you can entice to come back. Remember, it’s much easier and cheaper to sell to existing or past customers, than it is to attract new ones. The gains you make in Keys 3 to 7 will apply to your existing customers as well.
The ability of this business to meet the increased demand must be taken into account, and that’s why Systemisation is such an important part of the Seven Keys Formula. Nevertheless, you can see how making ambitious but achievable improvements to all Seven Keys can have a big effect on the overall value of your business.