What a business depends on – 5 digits that an entrepreneur must know (part 1)
Are you an entrepreneur and do you have your own business? Or strive to open a business and become an entrepreneur? Have you ever wondered what the business depends on and how to make it successful? Understanding what the business depends on and which are crucial for the success of your own business is the direct responsibility of the entrepreneur. We’ll talk about this today. Rather, we’ll talk about what exactly you, as an entrepreneur, are obliged to monitor and analyze in your business all the time.
What 5 digits should an entrepreneur know and why does a business depend on them
First, let us single out one business axiom: business is not luck and not luck, it is a process that requires constant monitoring, analysis and conclusions. Everything needs to be measured and analyzed. Really everything. Today we will consider the most important parameters – what your business really depends on, and which you, as an entrepreneur, must always know. So let’s go.
1. Average bill
Everything seems to be simple and clear, but let us nevertheless consider a concrete example. Let’s say you have 10 customers who have made purchases for different amounts (see table below).
Buyer / Sale
Buyer / Sale 1 10000 rub.
Buyer / Sale 2 8000 rub.
Buyer / Sale 3 12 000 rub.
Buyer / Sale 4,600 rubles.
Buyer / Sale 5 5000 rub.
Buyer / Sale 6,000 rubles.
Buyer / Sale 7 13 000 rub.
Buyer / Sale 8 8000 rub.
Buyer / Sale 9 8000 rub.
Buyer / Sale 10,000 rubles.
Average bill = Total sales / number of customers or sales
In this example, 90000/10 = 9000 rub. average check. From there you can draw certain conclusions. For example, you understand that with 10 customers or sales, your income is 90,000 rubles. Accordingly, it is easy to calculate that if you have planned an income of, say, about 300,000 rubles, you need to attract 23 more clients.
2. Conversion Rate
This parameter shows how many potential customers have become real customers. In other words, this is the ratio of the number of customers at the input to the number of customers at the output of the sales funnel. Those. By marketing and advertising you attract a certain number of people, and some of them become customers. The percentage expression of this part represents the conversion.
For example, with contextual advertising on the Internet you attracted 100 potential customers (there were 100 clicks on your ad in a week). Of these, 10 bought something (or made another action you need). Accordingly, your conversion rate for this time period and this marketing channel is 10%.
What conclusions can be? Continuing the example above, you understand that in order to get 23 new customers, with a 10% conversion, you need to attract 230 potential customers.
3. The cost of attracting one client
Here, too, is quite simple and clear. You spent 5000 rubles to attract 10 clients, which means that each client costs you 500 rubles. Bearing in mind the average check of 9,000 rubles and a margin of, say, 50% (i.e. 4,500 rubles), you know that there are 4,000 rubles from each client from which you must cover all your other expenses, plus, most importantly make a profit.
4. Lifetime customer value
This is what business really depends on. That business in which there is no such concept (because it is sold only once, for example) is a bad business. Customer’s lifetime value is the amount that your customer will give you for the entire time he uses your services or purchases your goods, respectively, i.e. from the moment you became a client of your business until the moment that you ceased to be it for any reason.
To do this, you need to know the following:
Average bill (we already know).
Margin (in our example, it is 50%).
The cost of attracting one client (also already calculated).
The total income from the client over a period of time (preferably a year), i.e. the number of purchases per year, multiplied by the average check.
The number of years on average during which the client remains so.
Suppose a person uses services or goods on average 2 times a year for 5 years. Our average bill is 9,000 rubles, i.e. taking into account a margin of 50% – 4500 rubles profit. The cost of attracting one client is 500 rubles. Simple mathematics will say that the customer’s lifetime value is 2 * 4500 * 5 – 500 = 44500 rubles. But not so. There is a tendency (I admit, I have not tested it myself yet, I believe in knowledgeable people) that the annual purchase amount with regular customers decreases over time. Let’s say it decreases in such a way that every year the amount of purchases is equal to 80% of the amount of the previous year. We get the following situation:
Customer annual value
Year 1 8500 rubles
Year 2 6800 rubles
Year 3 5440 rubles
Year 4 4350 rubles
Year 5 3480 rubles
Customer lifetime value:
28 570 rubles
Accordingly, we are not talking about the amount of 44500, but about 28750 rubles. Why is it so important, just below.