At school, maths wasn’t my favourite subject. I think that had a little to do with the teachers and a lot to do with what I considered to be “cool subjects” back then! However, one of the things that stuck with me was the power of compound interest. If you are a similar age to me you may recall Natwest’s piggy bank series in the early 80s? Save enough money (in the high street bank rather than your piggy bank) and you got a series of delightful ceramic pigs. How is this relevant to a formula for business growth? Well, it is all about compounding. The only reason I made it to pig 2, was the compound effect of interest – I was paid interest on my interest.
Different Ways of Looking at the Formula for Business Growth
In a previous post, we recommended you should work backwards from business growth results, first establishing drivers of those business growth results, then the changes in your business that will enable growth. Compounding works within this context – it combines several results for greater effect, and you should work on them simultaneously, rather than just focusing on one.
Here are three examples. The first does not use the idea of compounding, while the second and third do.
2 X customers = 2 X revenue
For a 100K revenue organisation, this would move you to 200K. This formula for business growth could be accurate, but it would drive you to focus on a single thing – increasing your number of customers. This is unlikely to be a great strategy. The acquisition cost to double your customer base and service such an increase could be huge. The profit created by this strategy might be limited. However, much “common wisdom” focusses on acquiring new customers as the primary growth strategy.
Perhaps a better strategy recognises the incredible power of compounding. This would involve a focus on lead quality, lead conversion and average sales value rather than overall customer numbers.
Quality Leads X Conversion Rate X Average Sale Value = Revenue
If 100 prospects enter the pipeline, our qualification processes generate 50% “quality leads”, and our conversion rate is 20%, with an average sale of 10K, we have a 100K revenue. Rather than doubling customer numbers, relatively small improvements to each result have a big compound effect. If we were to improve our qualification skills and processes to create 60% quality leads and move our conversion rate to 30%, with an average sale of 11K, total sales = 198K. Revenue has almost doubled. See How to Easily Double Your Sales for this idea developed further.
Super! But what about increasing customer numbers if we can? And where do we account for the number of transactions that they make with us?
Customers X Average Transaction Value X Number of Average Transactions = Revenue
We’re using quite different figures below, but once again a 100k revenue business more or less doubles revenue through relatively small changes (a 25% uplift) in three key results areas.
|25%||25%||1 in 4 (25%) customers repeat|
Seven x 10% Improvements = Double Your Profits!
Finally, is this the holy grail of business growth? One guru, Pete Williams, a guest on the excellent The Next 100 Days podcast (listen here) describes a chain of seven levers for business growth. In his book, Cadence – A Tale of Fast Business Growth, he parables a struggling bike shop, which turns its fortunes around, by making a series of 10% improvements across seven levers. And seven 10% improvements compounded together is? About 195%, or in other words a doubling of profit!
I’ve described several examples above. The key point is the effect of compounding. Increasing any single result will increase revenue while increasing two or more together has a compounding effect. Therefore, do not just focus on one result e.g. increasing your customer numbers in isolation.
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