Ask any business owner what their business needs and you will get a host of different answers. Some will say “new equipment”. Others will say “better staff” while others will say “more time.” Many will probably say they need all three and then some! However, the most common responses, when all is said and done, will invariably be related to the following three areas: More Customers, More Revenue, and More Profit. Ask those same business owners how they plan to go about getting more customers, increasing their revenues, and their profits. Their responses will likely be something related to marketing. They will want things such as more advertising, more direct mail, larger yellow page ads, more salespeople, etc. Many will just have a collection of ideas without a specific action plan for growing these areas.
What many business owners don’t realize is that fundamentally every business ever conceived operates on is exactly the same; ‘business chassis’. This is a very powerful, yet simple concept. Few are really aware of it and understanding this principle can play a major role in determining the success of that business. We at ActionCOACH call this ‘business chassis’ concept the 5 Ways Principle.
It can be demonstrated with a simple formula: Leads x Conversion Rate = Customers x Average Dollar Sale x Number of Transactions = Revenue x Profit Margin = Profit. As you can see, customers, revenue and profit are the “outputs” or results in this formula. Leads, Conversion Rate, Average Dollar Sale, Number of Transactions and Profit Margin are the “inputs” that drive the “outputs”. So if you want to change the outputs in the formula, you must first change the inputs. As an example, increase the number of leads or the conversion rate and the number of customers will increase.
What happens then, if we increase both the number of leads AND the conversion rate? Well, the two do not simply add together, but rather one multiplies the other. This is the great strength of the 5 Ways Principle – it is a compounding formula. With a compounding formula, small improvements to each part of the formula can quickly improve your results in a dramatic fashion. There are five variables in this formula and each can be affected by a whole range of activities or strategies. In fact, there are literally dozens of strategies any business owner can implement to improve each area.
For example, to improve the number of leads, a host of marketing strategies such as advertising, direct sales, press releases, flyers, brochures, etc. are available. Use of sales scripts, offering guarantees, selling exclusive products, and written testimonials are all great ways to increase your conversion rate. Newsletters, exclusive offers to existing clients, and booking the next visit can all increase your number of transactions with existing customers.
Want to increase your average dollar sale? Offer package deals, cross or add-on-sell other items, use a checklist, or offer financing plans.
How about improving profit margins? Increase your prices, modify your compensation plans, promote idle or slow time, reduce general & administrative expenses, etc.
As you can see, there are a host of different strategies to improve each area, although some that might work for one business may not work for another. The fun part about this principle is the power of compounding. A minimal increase in each of the five areas can quickly lead to double & triple digit increases in your bottom line profit. But in order to gain this maximum benefit, a business must improve in each of the five areas or there will be little, if any, compounding effect.
So why are most business owners not using this powerful model to its full potential? The primary reason is usually lack of effective measurement. As a business owner, the first place to start is to determine your own 5 Ways numbers then implement effective testing & measuring processes for the various strategies you choose to improve each of the five areas. This approach is simple, but it takes discipline, focus and time – yet it can make all the difference between a great business and a business that just gets by. So are you up for the challenge?