Understanding how to properly measure a goal is one of the biggest problems we run across in our consulting. Simply saying “I’m going to make more money” is not a goal that can be tracked and measured appropriately. You must start by setting an actual, feasible goal.
Once you have a hard target (a specific revenue growth target, a cost-cutting target, or other goal), you have to think about how you are going to track your success. One thing most people tend to do is measure the success of a goal with the actual outcome of the goal. “I want more revenue so I’m going to measure it with any increase in revenue.” They treat it like a math function where the outcome is the same as the input [ for those math-friendly, think of it as f(x) = x or f(revenue) = revenue ]. What you actually need is a set of variables you can track, measure, and influence. Each variable will determine the different strategies and tactics used to influence the larger goal.
A good analogy would be weight loss. If your goal is to lose weight, you typically focus on a couple key elements like calorie counting and exercise. These are the key factors you’re going to control to achieve the overall goal of weight loss. You wouldn’t say “I’m going to do a bunch of stuff and only track changes in my weight” because – how would you know if anything you’re doing is actually working?
For your business goal, finding the proper activities to measure requires an intuitive, in-depth understanding of your business and the elements that go into it. Simply saying “I’m going to make more prospecting phone calls” may impact the amount of sales you make, but it may not be the only thing to lead you to more revenue (if it is, go make those phone calls now!) and it may not be the best use of your time to increase sales. Time and money are limited resources so putting your best efforts in the places they can have the most effective impact is essential.
Store Front Example
Take this basic “function” for a client who wanted to increase the revenue of his store front. This particular client had seen relatively flat sales for the past 5 years and was looking to engage in a strategy to expand the business.
f(increase revenue) = (store foot traffic) + (products sold) + (return customers)
It reads: the goal of increased revenue will be the result of the strategic variables: store foot traffic, products sold, and return customers.
After analyzing the business, this function shows the strategic variables we identified to reach the goal of increasing revenue. You might look at this and say “it’s obvious” but the real magic comes in the tactics used to influence these variables. A selection of a non-essential strategic variables becomes a waste of both time and money. Leaving one out could leave you short of your goal. Adding in a variable like reducing inventory might have increased his margin but not his revenue and may have actually been counterproductive, given the growth strategies we were pursuing.
Now we focus on each of those strategic variables. How could you increase store traffic? Advertising (and its many possibilities), Marketing, extending store hours, events, etc. Not all of these are feasible and selecting the right combination to maximize the ROI is, quite honestly, my favorite part of the consulting process. Tracking these activities can tell us whether we are having an impact on store traffic (which is an essential piece of the function).
Next we look at products sold. There are two ways we decided to look at this variable: total orders (inventory moved) and the number of products sold per order. If we were successful in driving more foot traffic, ideally we would see an overall rise in the amount of products sold. However, we wanted to see if we could increase the amount each customer purchased. This led to the development of specific tactics that would attempt to maintain the client’s margin but also increase the sales per customer.
Repeat business was another essential variable in our analysis. A large percentage of customers were repeat customers meaning that each new repeat customer acquired had a very good lifetime value for the business. We elected to build retention and outreach systems to both increase the total number of repeat visitors and also influence the frequency they came in to the store.
This was a relatively simple model used to increase the revenue of a store front. We targeted key strategic variables that would lead us to the specific tactics to help achieve the desired goal. Possessing a deep understanding of how the business works and the environment it operates in are key elements in the development of these types of analytic techniques. Performing tactics without the insights into how they relate will not lead you to your goal and will probably lead you out of business.
I was asked a question about this topic:
I run a small business and this type of strategic consulting can be expensive for a business if you want to bring in an outside consultant. If my business goal is to increase revenue by a certain percentage, how can I justify something that might cost more than the increase in revenue itself?
Determining whether to move ahead with a project can be another potential stumbling block. In our example above (with a storefront client having flat revenue for 5 years), let’s say a 10% increase in revenue is $20,000 for the year but the costs to bring someone in, develop a strategy, and build some of the pieces (including an advertising budget, if needed) is $30,000. Do you do it or not? The answer is: it depends. Most would look at it and simply say “not worth it” but not you, you’re smart. You realize that the value of these systems and structures will generate not only a 10% increase in revenue this year, but also in the next two years. That’s $20,000 in Year 1, $22,000 in Year 2, and $24,000 in Year 3. If you bring all of those values to the present value at a discount rate of 15%, that’s $59,016, a profit of $29,000.