In my work dealing with business owners, I’m often asked how to increase sales. Often, lifting sales can be viewed as too daunting, particularly if your current sales are already significant. I think this is because people don’t often break sales down into its component parts.
Invariably I focus on two simple, yet effective processes for breaking the sales process down into manageable chunks to increase sales.
The Revenue Model
The first process I recommend is what I call the Revenue Model. This model can look different for different businesses. For many businesses, the revenue model looks like this:
Sales = Number of Customers x Transaction Frequency x Average Dollar Sale
Example:
$1m = 1000 x 5 x $200
As you can see from the above equation, sales volume is an outcome. It is a result. If you want to influence the result, you must first influence the parts that it is comprised of.
The number of (active) customers an organisation has, is relatively easy to determine from your accounting system. Transaction frequency refers to the number of times your customers buy from you each year (on average). This can be calculated by dividing the number of invoices issued during a period, by the number of (active) customers. The average dollar sale is simply your total sales for the period divided by the number of invoices raised in that period.
It therefore follows that if you want to increase sales, then you can achieve this by increasing the number of your customers, by increasing the number of times they buy from you (transaction frequency) and increasing the average dollar sale (getting them to buy more from you each time) and a combination of each of the above. From my experience, many businesses focus on bringing in new customers and ignore the potentially ‘low hanging fruit’ of selling more to their existing customers.
It is then relatively easy to develop strategies to achieve increases in each of the above components of sales. However, it only takes a small increase in each of these parameters to bring about a significant change in your sales volume. To illustrate, let’s assume we were able to increase each of the above three parameters by (only) say 10%. Here’s what your sales volume would then look like:
$1.331m = 1,100 x 5.5 x $220
As you can see, the net result is a 33% increase in sales. The key then is to set key performance indicators (KPI’s) which are measured and managed each month to ensure you hit the above numbers.
What are the lead indicators you should be measuring for new customers? Maybe it is sales calls made, conversions etc.
What are the lead indicators you should be measuring to increase transaction frequency and average dollar sales? These might include sales promotions, bundling (e.g. three for the price of two, or 50% percent off the second item purchased) etc.
The Ansoff Matrix
The second process I recommend for increasing sales is the Ansoff matrix, developed by H. Igor Ansoff and first published in the Harvard Business Review in the late 1950’s. It typically looks like this:
This tool forces you to think strategically about where your business growth will come from. Will it come from:
- selling your existing products to your current customers (market penetration);
- selling your current products to new customers or markets (market development);
- selling new products to your existing customers (product development); or
- selling new products to new customers (diversification).
Clearly pursuing sales growth in some of these areas will be easier than pursuing them in other areas. The key is to work out which strategy (or blend of strategies) is right for you having regard to the stage of your business life.
Part of the Revenue Model above was focused on each of the areas in the Ansoff matrix. Increasing the number of customers was about market development (selling existing products to new customers). Part of it was about market penetration (selling more existing products to existing customers). Increasing the average dollar sale could also be about product development (selling new products to existing customers).
Once again, the key is to develop and implement strategies for where your future business will be generated from.
Just one final comment on sales growth. Growth is important, but it needs to be sustainable growth. The insolvency courts are littered with stories of fast growing businesses that went broke.
As the saying goes – turnover is vanity, profit is sanity and cash flow is reality.