Elements Starts the Conversation: The Growth Formula
(About a 2 Minute Read)
Online accounting and cloud technology enable the business owner to have never before seen sales analysis in real time. It reduces the time loss in analysis as the business owner can see outcomes of their marketing decisions in real time on their smart phone.
So let’s see how this is happening.
Revenue is made up of three elements.
- Active clients. Not total clients.
- Number of transactions in any time period
- Average sale value When multiplied together, Revenue is determined. This is the number that appears on every financial statement for the business. One customer comes in once and spends one dollar in the business. The revenue on the financial statements for this duration is one Active Client transacting once spending one dollar. This generates a revenue figure of $1. Elements refers to this as the Revenue equation.
Our happy customer leaves with her $1 drink. The business takes active steps to grow each of the Elements of Revenue.
In a second period, the business may activate a referral system where our first Active Client is encouraged to bring a friend. The business may be open for breakfast and lunch. The business offers food and drink at a better price than buying individually.
The Active Customer brings along a friend creating two Active Clients. The business incentivises the two to frequent twice a day each. And each time our customers come in, they spend $2 every time. In a comparable time period the business income has increased to $8.
One additional customer multiplied by one additional visit multiplied by one additional dollar has led to a growth of seven dollars.
Incremental improvements exponentially improve the revenue growth of the business.
It becomes obvious that focussing solely on Revenue provides little direction to grow sales. Revenue is a blunt instrument when it comes to measuring sales movements. Traditionally businesses have calculated sales as a result of sufficient income to cover budgeted costs plus a bit for the owners. This ignores the composition of sales entirely.
For two reasons, this type of budgeting fails:
- There may not be sufficient Active Clients willing to spend enough frequently enough or
- The business does not know how to build on the “Elements” of sales.