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Sales metrics that Work -3 January 7, 2008

Posted by David Dirks in Increasing Your Profitability, Sales Metrics, Solving Business Problems.
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David DirksBusiness metrics are designed to do two things: to help you ask questions and then point you in the direction for the answers. By themselves, business metrics do nothing more than monitor your business performance in a specific area of your business. Like the computerized dashboards found in most cars today, your business metrics can help you to identify both strengths and weaknesses in your business. When your oil indicator light comes on, it just points to a potential problem; it doesn’t do anything to fix the problem.

Whether you have a retail, B2B, or service-based business of any size, business metrics are your friend.

In previous blog posts, (see under “Sales Metrics), we discussed sales metrics related to your square-footage and your employees. Now let’s look at your customer.

What is your average sale per customer? This is a basic sales metric that can tell quite a story if you keep track of it over time. Seasonal fluctuations are easy to pick out when you look at this sales metric on a monthly basis. Over time, average sales per customer can help you determine:

-Is my share of their wallet getting larger or smaller? If your average sale per customer year-over-year goes from $550 to $375, you’re already in deep. Why is your average sale per customer on a slide? What can you do to reverse the trend? If your average sale per customer is going up, then you need to understand exactly why it’s going up. Is it because of specific sales or marketing activities you are undertaking?

You’d be surprised at the number of businesses that have a few successful years and then plummet out of business. Chief reason: they were too lazy to really understand the dynamics of their own success. When those dynamics no longer had any positive affect, they had no clue what to do to stem the losses. They were ‘too busy’ to spend time looking at business metrics.

-What can I do to reduce seasonal fluctuations in average sales per customer? Years ago, one local ski shop in the Hudson Valley decided that the seasonal fluctuation in their ski business could be offset by expanding their business to sell patio furniture in the off season. It turned out to be a great counterattack against their traditional business.

What is your net profit per customer? The best way I think you can look at this metric is on a customer-by-customer basis. If you have good financial controls, you should be able to determine how much profit each customer generates (monthly/quarterly/annually) based on the goods or services they have purchased from you. If you can’t, then you’d better find a good accounting firm before even considering this metric.

-Why are some customers more profitable than others? Is it because of the mix of goods or services they buy? Is your pricing varying from customer to customer? Are the repeat business discounts you’re providing too deep? Is your pricing built on solid financials or some educated guesses? What can you do to encourage customers to purchase better-margined goods or services?

Good business metrics can help you drive your business results by identifying areas of strength and weakness. The key is to understand the ‘who, what, when, where, and how’ of each metric so that you can work towards creating better performance in the areas that count, like overall profitability. The worst thing you can do is to ignore them.

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