The commercial with the fast-talking sales guy and lots of shiny objects screams, “We lose money on every sale! We make it up in volume!” Some folks justify the craziness by suggesting that they are aggressively selling loss leaders. The retailer sells razors below cost so that they can sell the blades at an enormous mark-up. Other viewers realize that the seller is a fraud. Regardless, businesses pursuing growth by manipulating common understanding of sales and costs is on a high-speed train racing into the mountainside.
Measure What’s Important
Successful business growth is a byproduct of creating value. Value must be measurable. Money serves that purpose. Understanding how money is spent and made is more than an accounting exercise. Sales success requires pricing goods and services such that a profit is available when the transaction is done. How that profit is measured depends on how the business produces results.
Costs are important to measuring profitability. Prices are even more important because they require subjective judgment. What is important is the relationship between the two. Effective sales efforts demand accounting calculations that consider thorough understanding of all components of a transaction. Businesses that push products with large gross margins still fall flat if corresponding operational metrics are ignored. A local bar has enormous margins on drink specials. However, without paying attention to exorbitant marketing costs to attract targeted customers, or additional cleanup costs following Wicked Wednesday Nights, the revenue never makes it to the bottom line. Not evaluating the obscure measurement of Furniture, Fixture & Equipment expenditures per promotion creates a subtle cash drain silently running the owners out of the bar business.
Correct What’s Wrong
“What gets measured, gets managed” is an old business saying. If the business purpose is to earn, then manage profits, then key components must be measured! Physical costs, behavioral costs, leadership costs are all part of maximizing performance. An auto shop that manages labor carefully through superior scheduling discipline will lose customers because they use inferior replacement parts leading to bad customer experiences. If the shop’s leadership is irrationally faithful to the inferior supplier then, they inherently gave permission to workers to hold onto inefficient behaviors. Ignoring facts affect profits by creating higher labor costs, which creates higher prices for cost-conscious customers. Bad behaviors quickly evolve into reduced revenue. Find and fix organizational holes.
The entire value equation must be analyzed, measured and corrected. A gourmet pizza joint decides never to skimp on their premium signature sauce. However, they may save a few dollars on mushrooms and bell peppers. Leaders must measure their business minutely so that they can meet expectations for their customers and stakeholders simultaneously. Furthermore, they need to be able to articulate how resulting decisions benefit both groups. So, when changes are made, authenticity remains. Decisions based on measuring product costs, competitors’ prices and customers’ alternatives all factor into profits and enduring success.
Business success requires mastery of details. Mastering those details require intimate knowledge of key metrics. Whether it is conversion rates of clicks per dollar of revenue, or the average profit per patron who orders the specialty key lime pie, managing quantitative business facts is the difference between legendary success and humiliating closure. Identifying metrics that receive the most attention require leaders to absorb feedback from the frontline, as well as analyzing financial reports. Business success demands thorough knowledge of both culture and analytics. Watching the metrics means closely engaging the customers, as well as operational details. Leaders must immediately spot deviations from best practices and even more quickly introduce improved practices. Success requires anticipating key metrics that result in operations delivering the profits that the business requires! So, what key metrics specific to your business will you watch now?
By Glenn W Hunter
Principal of Hunter And Beyond, LLC