How many times have you come across an entrepreneur talking about their “six-“ or “seven-figure” business? So many people are using these labels, but they don’t tell the whole story. As a financial manager, I have personally seen businesses burn through $10M+ funding in one year, without ever generating profit. Sure, they had sales targets, but they lacked a clear roadmap to profitability.
When someone talks about their “seven-figure” business, they are usually referring to their top-line sales revenue. Revenue is an important benchmark, but it doesn’t account for all the work behind the scenes that can make or break a business. Strong revenue does not always translate into strong profits. You would be surprised to know how many “growing businesses” have their profits eaten up because costs were not controlled. The key to profitability is to know what is happening between the top and bottom-line, and using that information to optimize.
Understanding the numbers
Let’s say that you have an email list of 1,000 subscribers and you are about to launch a new digital product, priced at $50. You expect about 10% of your subscribers to buy, so you would sell 100 units and make $5,000. Great. You have big plans and you want to generate long-term income, so you need to spend some money on advertising. You decide to use Facebook Ads, and estimate you will pay $3 per subscriber to your email list. To get the next 1,000 subscribers, you plan to spend $3,000 and generate another $5,000 in sales. That’s a $2,000 profit, or 40%. Awesome, you’re making money.
But what if your subscribers end up costing $6 each? Your revenue hasn’t changed, but now you’re losing money. What if only 5% of your new subscribers make a purchase? You’re losing money again. See how quickly a profitable scenario can change? Without paying close attention, you can spend thousands of dollars without getting the results you want. It happens all the time.
Many business owners don’t map out these profitability scenarios before they start. They throw some money into advertising and hope it works out, because it did for other people. If you’ve done that in the past, you’re not alone. But there is a much better way to keep a handle on things and make sure you’re getting the most bang for your investment buck.
Getting started with metrics
To be as effective as possible with your business growth strategy, you should first know where you are right now. If you’re just launching your business, you’re probably at zero. But if you’ve been operating for a while and already have some sales, you should get clear on how you are performing today. You can’t figure out how to get to your destination without knowing your starting point.
Enter the Metrics Tracker. The first step is to create a simple spreadsheet that tracks your daily metrics. A “metric” is a statistic about your business. Number of sales, number of email subscribers, Number of website visits, and Conversion rates are all examples of metrics.
My secret for selecting the right metrics to include is to identify every interaction a potential customer has with your business, from first learning about your business to finally making a purchase. For example, if you are running ads, then you should track Number of Impressions (i.e. number of times the ad was viewed), Number of clicks on the ad, Number of subscribers to your email list (if that’s the goal of the ad), and/or number of sales. Those are the interactions that a potential customer has with your business from when they first learn about your business through the ad, to when they subscribe or make a purchase.
Next, calculate and track percentages for the metrics that you can control. For example, if you’re running ads, you may want to know the effectiveness of the ads, so you would look at your “click-through rate”, which is the percentage of people that clicked on your ad (Number of Clicks / Number of Impressions). The higher the percentage of clicks, the more effective your ads. If you have multiple ads, you can compare the click-through rates to see which ad is most effective. You can also test edits on an ad and see if your click-through rate increases. Some of these optimizations are automated within the big ad platforms, like Facebook and Google, but it’s important to track and review the data yourself as part of the bigger picture of your overall business.
Focusing on profitability
Since we are focused on profitability, your Metrics Tracker should include daily revenue and cost dollars. Going back to the ad example above, you would want to understand the “cost per subscriber” on your email list (Cost of Ads / Number of Subscribers), and the “cost per sale.” You can compare your “revenue per sale” and your “cost per sale” to understand your daily profitability.
When you are looking at the numbers as a reflection of the customer journey, you can see how a change in “click-through rate” can trickle down to a change in “cost per sale,” as an example. Perhaps getting more clicks per impressions on your ads will reduce your “cost per sale” down the line. The Metrics Tracker brings these touchpoints together to show how each customer interaction impacts the bottom-line. As you become more comfortable reviewing your metrics, you will naturally start to pick up on weaknesses, such as a decreased conversion rate. You can fix problems before they cost you thousands of dollars, because you will spot them right away. You can compare your metrics to companies within your industry to find opportunities to optimize. Your numbers will lead you to the right actions to grow your business.
Next steps to growth
Once you have a grasp on your current performance, the next step is using your learnings to create a detailed, 12-month financial plan. Select the most important metrics for your business and set targets for each. Then calculate the profitability that would be achieved with those metrics. For example, if you plan for 100 sales at $50 with a $10 cost per sale, your expected profitability would be $4,000. At your existing click-through rate and conversion rate, how many impressions would your ad need? Use that as your Target Impressions.
Map out your results for a full year. Then develop your detailed action plan to achieve the results. You will be amazed how much more effective your planning will become when you are prepared with a deep understanding of your numbers.
If you want to get started with metrics right away, but aren’t clear on how to create your tracker or which metrics to use, check out my Money Making Metric Tracker. This fully-customizable spreadsheet is all set up and ready for your inputs. If you use it consistently, the tracker will save you time and money by showing you what’s working and what’s not. Unlock the insights in your numbers!