Debunking the 5 Ways Equation - Confusing and Selective Truths
28 Aug, 2019 by David Seamans
The coaching industry has been selling "snake oil" by way of the 5 Ways Formula under various names, as "the Five Ways formula for business success", "The Super Business Success Formula" and whatever else for years. The formula has become the mantra for coaching industry. Don't get me wrong -It is better than nothing when it comes to assisting SME's run their business. But in its present stage, offers little tangible value and cannot be applied to achieve meaningful results.
The Five Way Formula is:
Number of Leads * Conversion Rate = Number of Clients * Number of Transactions * Average $$$ Sale = Turnover / Income * % Margin = Profits
There are many issues with this formula:
- Nothing reconciles to the SME's financial records. The accountant and financial administration cannot "buy into" the process for monitoring and reporting purposes. Thus, the sales people get no real information. Coaches dance around the intangible variables, avoiding definition at all costs.
- Traditionally clients maintain spreadsheets for reporting. Since definitions are obscure, the client has difficulty maintaining this information. What does "Number of Clients" mean? Names on CRM, existing debtors, past and present debtors, and how are (cash) sales (without names) to be handled. This results in rapid abandonment of spreadsheet maintenance and loss of the relevant data.
- The Five Ways formula variable "Number of clients" only refers to new clients who have made their first purchase in this period. It ignores existing clients who are active purchasers. It is impossible to compare the "Number of Clients between durations. The Five Ways fall on the first hurdle.
- Number of leads and Conversion rate feed into "Number of Clients". This suggests one strategy of lead generation. It suggests one conversion success rate strategy. In reality, there could be many.
- The formula ignores "Number of Transactions" or "Average Dollar Sale" strategies. There is no direct line to these variables.
- The Five Way Formula creates extra work which is made difficult. The SME will not "buy into" doing extra work using stressed staff with poorly defined outcomes.
- The coach cannot be held accountable by any standards as to whether their techniques are effective. If one cannot measure a problem, one cannot measure the success or failure of the outcomes.
- The formula bewilders business owners. The formula confuses things by introducing “Margins” and “Profit”. These are subjective and variable. Every accountant knows that there are two set of books - one for management reporting and one for taxation purposes. The rules are not the same for both - that makes no sense. A workable formula must help the business owner increase sales and improve cash flow. Forget about the tax office.
There is no overriding reason for this formula as a result of the reasons listed above. It has found favor as a simple sales tool for wannabe coaches to sell to unwitting businesses.
Like so many things, it sounds correct, "warm and fuzzy" and true. But it cannot be applied effectively nor accurately.
Business coaches understand that any business must generate cash flow from sales. So the formula must:
- focus on the variables of "sales" which are the most important part of the business.
- be reconcilable to the financial statements
- have clear, defined, unambiguous variables
Coaches (and business owners) understand: If you cannot measure, ..you cannot control, ....you cannot improve AND YOU LOSE MONEY.
The 5 Ways Success Formula flounders in achieving measurement.
The Five Way formula has three segments:
- Strategy: Number of Leads * Conversion Rate = Number of Clients
- Measurable Results: Number of Clients* Number of Transactions * Average $$$ Sale = Turnover / Income
- Distraction: % Margin = Profits
Since there are multiple strategies for:
- Generating new clients
- Promoting the number of transactions
- Growing the Average $$$ Sale
As such, the misleading "Number of Leads" and "Conversion Rate" come under the category of "Strategies" for Generating New Clients.
The Distraction of "% margin" resulting in Profits is irrelevant so remove it. (This is not to say Profits are irrelevant but they are second to Cash Flow - a point every SME owner understands.) "% margin" complicates the outcome without any benefit.
This leaves only the concrete, tangible, measurable: Turnover / Income = Number of Clients* Number of Transactions * Average $$$ Sale
Improved Turnover generates Improved Cash Flow.
Turnover reconciles to the accounting and reporting Turnover figure. The financial staff can report on this.
The formula interfaces to the accounting / POS / sales cloud based software transparently.
- The formula provides timely and accurate about the success of the strategies.
- The formula supports manipulation and analysis of outcomes.
- The formula avoids time delays where the results are immediate and indisputable.
- The formula promotes instantaneous feedback.
The formula enables the development of effective sales tools.