Turning Your Business into a Money-Making Machine
You’re a business owner. You naturally want to have a growing and successful venture. To do so, you need to transform it into a money-making machine. Just like all machines, your business has a primary purpose—to make money. After all, that’s really what it all comes down to. We can have all the passion in the world; we can have a great product or service, but if the business is not making money, it will not survive. But the opposite is also true—if it can make money, you’ll have a financially successful business that you own, instead of owning a high-demanding, low-paying job.
So, we need our businesses to make money. That probably doesn’t come as a big surprise to anyone. But there is a lot that goes into it. To address these issues, this is the first of a three-part blog series based on our upcoming webinar, where we will talk about the “Sixteen Parts of Your Business that Drive Revenue, Profit, and Cash Flow,” among other topics. But before we can get into profits and cash flow, we have to first talk about revenue. Simply, your business needs to bring money in based on the products or services you sell. And there are five parts you need in place to do that.
The Five Parts of Revenue Generation and How to Improve Them
1. Leads
Leads are the number of ideal customers that have been made aware of your business through your marketing efforts. Leads drive revenue because ideally, the more leads you have, the more paying customers you will have. And more paying customers means increased revenue. For example, if you have an HVAC business and you post an ad online (e.g., Google Ads) for HVAC services and a potential customer sees your ad and calls your office, that is considered a lead.
How do you improve leads?
The best way to improve leads is by optimizing your marketing. You want to ensure that any money you spend on marketing has a direct impact on the leads you receive. If it doesn’t, you want to redirect that money to another marketing strategy.
2. Conversion Rate
With the right marketing efforts, you have leads coming into the business. That’s great, but not all leads become customers. This is where the conversion rate comes in—the percentage of leads that become paying customers.
As discussed above, where leads measure your marketing effectiveness, the conversion rate measures your sales effectiveness. This drives revenue because if you can convert more of your leads to paying customers, it will directly increase revenue.
Taking our HVAC business example again, let’s say you had 10 leads last week. If you were able to convert 2 of those 10 leads into paying customers, then you would have a 20% conversion rate. This is a simple formula— 2 customers / 10 leads = 20% conversion rate.
How do you improve your conversion rate?
To improve your conversion rate, you want to focus on your sales techniques. You already have the leads, so they are interested in whatever you are offering. But how effective is your sales strategy? You need to be able to close the sale.
3. Retention Rate
Now that you have some paying customers, you want to keep them, of course. This is your retention rate—the percentage of customers who come back each year. This drives revenue because if you can get existing customers to purchase again, it will increase your revenue.
Let’s say that you had 1,000 customers who purchased your HVAC services prior to December 31st of last year. If you were able to get just 5% of those customers to come back and purchase this year, you would have 50 customers that already know, like, and trust you and are willing to spend money. For the most part, you don’t have to worry about leads or sales techniques because they already know what you have and are returning for more of it.
How do you improve your retention rate?
Improving your retention rate comes down to providing quality products or services and offering exemplary customer service. If you do those two things, your retention rate will improve.
4. Purchase Frequency Rate
With your returning customers, the question becomes how many times they will purchase from you in a year. This is the purchase frequency rate, which revenue because the more times you can get a customer to purchase from you, the more your revenue will increase.
You can dramatically improve revenue by getting existing customers to buy again. Not only will you be earning more from each customer, but you also wouldn’t have to spend additional marketing dollars. In your HVAC business, if the only thing you did was get additional customers to buy again, you would increase your revenue without having to get new customers.
How do you improve your purchase frequency rate?
You can improve your purchase frequency rate by implementing loyalty programs that encourage repeat purchases.
5. Average Transaction Value
This is the average value of every purchase a customer makes. This drives revenue because the more you can get a customer to spend, the more revenue will increase.
Let’s say that in your HVAC business, the average value of a transaction is $500. By improving the average transaction value to $600 or $700, you will see an increase in revenue—all without having to get any new customers. The more you can get a customer to spend, the more revenue will increase.
How do you improve your average transaction value?
You can improve your average transaction value by increasing your prices, offering package deals that provide additional value at additional costs, and offering more add-ons to your existing products or services.
The Revenue Formula
The above five parts all work together to increase revenue. In conjunction with focusing on the strategies above, the following formula can help you determine where your business is regarding revenue generation:
- Leads multiplied by the conversion rate equals new customers that purchased this year.
- Existing customers multiplied by the retention rate equals existing customers that purchased this year.
- New customers that purchased this year plus existing customers that purchased this year equals total customers that purchased this year.
- Total customers that purchased this year multiplied by the purchase frequency rate equals total sales transactions.
- Total sales transactions multiplied by the average transaction value equals revenue.
By improving any one or more of these you will improve revenue. Now, imagine improving them all to help fuel your money-making machine!
Ready to get started? Click here to download your free copy of “The 16 Parts of Your Business” eBook.
At Agile Planners, we take care of the numbers, so you can sleep at night. We provide strategic guidance and outsourced CFO services to companies of all sizes. We can help provide the strategy your organization needs for the growth you want. We understand that no two organizations are the same. And with our experience and financial knowledge, we can help develop the right strategic plan for your business to grow and reach its goals. Simply, we’ll be your trusted partner, so you can focus on running your organization. Contact us today to learn more about how we can help.
