≡ Menu

How To Target Your Ideal Sales Value

I introduced the idea of the Ideal Profit Formula in How To Target Your Ideal Profit based on the formula for calculating break even points.

This calculates a sales revenue value or volume that, based on the accuracy of the underlying assumptions, gives you an idea of what’s needed to give you the profit you want.

In this article, we’ll dig deeper into what the sales revenue value means in practical terms.

The Three Ways To Grow A Business

One of the best known ways to look at business growth is the Three Ways To Grow A Business Model.

This gave us the insight that sales revenue is made of three factors that multiply together:

  1. The number of customers
  2. The number of times they buy in a period
  3. The average spend each time they buy

The big revelation is that when most business owners think about increasing sales revenue, they think about ways to attract and convert more customers (factor 1) and ignore the other two, often much easier to improve, factors.

Targeting Your Ideal Sales Value

The Ideal Profit Formula gave us an idea of the value of sales revenue, this next stage breaks down that total across the three elements of the ways to grow a business model.

Comparing what’s happening in your current business with how you’d like to reach your ideal sales revenue identifies the gap in each factor and lets you focus on how the gap can be closed.

What’s Happening In Your Current Business

The easiest number to calculate is often the average sales value per transaction.

This is

total sales revenue
total sales transactions

Obviously you use the same period of time for both.

The next easiest number to get to is the number of different customers who bought in a period.

If you’re good with a spreadsheet, you can download the sales transactions into a worksheet and then use pivot tables to count the number of different customers.

Otherwise, you may have to go through and count up who has been buying. If you have a lot of customers, this can be time-consuming. Try to find a quick way to do this because I’m going to want you to do this regularly.

Try not to use the number of open accounts on your sales ledger / accounts receivable computer program.

This is because you’ll realise that you have many customers registered who have not bought. They are lapsed customers and are useful names to know if you want to try to reactivate them.

If you get into the habit of looking at active customer numbers, you’ll realise that there is valuable information looking from period to period.

The number of customers in the last period

Plus new customers acquired

Minus customers who have stopped buying

Equals number of customers in the current period.

The length of the time period used for this customer reconciliation should be based around the number of times customers buy. If your customers buy on average every two months, then you can use a period of two to three months. If you use too short a period, you will have many lapsed customers but it won’t be valuable information because it’s part of your customers’ natural cycles.

You can calculate the average number of times customers by with this formula:

Total number of sales transactions
Number of customers who bought

You will now have the three numbers for the period:

  1. The number of customers
  2. The number of times they buy in a period
  3. The average spend each time they buy

Because these numbers are important, check that they are right by multiplying them together.

You should finish up with the total sales revenue or close to it if you have rounded some numbers.

Using The Three Ways To Look At Your Ideal Sales Revenue

You can look at the sales revenue you want to give you your ideal profit in terms of what’s happening in your business.

In the future, you can:

  • Look to reach the sales growth by increasing one of these three numbers while holding the others constant. This will give you a very focused strategy.
  • Think about improving all three measures by similar proportions
  • Think about all three measures changing by different proportions (including decreasing some to make it easier to increase others).

If you focus on one measure, your growth is linear and it’s easy to calculate how much your targeted factor needs to improve.

E.g. Current sales revenue

  • Customers 1,000
  • Transaction value £250
  • Number of transactions 3
  • Total sales revenue = 1,000*250*3 = £750,000

Ideal Sales Revenue based on your Ideal Profit Formula calculation is £1,400,000

Then if you target new customers with the others staying the same, the number of customers you need is 1400000/(250*3) = 1,866.7

This is an increase of 86.67% which is the same increase as jumping from £750,000 to £1,400,000.

If you plan to change all three growth factors by the same amount, things get more complicated because of the exponential growth – a 10% growth in each gives a 33% growth in total sales revenue.

To give you an idea of how this works:

Increasing all three by 10% gives you 33% growth.

Increasing all three by 20% gives you 73% growth.

Increasing all three by 30% gives you 120% growth.

Or to put it another way:

If you want to increase sales revenue by 50%, you need to increase each growth factor by 14.5%

If you want to double sales revenue, each growth factor will need to increase by 26%.

You’ll have to do your own arithmetic if each growth factor is changing by a different number but remember you’ll only have to decide targets for two of them to reach your targeted sales revenue total.

Target 3 = Ideal Sales Total / (Target 1 * Target 2)

Moving Forward Into Your Marketing And Customer Strategies

If you know how many customers you need to reach the sales total you want, you can start looking at:

  • How to retain customers for longer (to reduce the number of lost or lapsed customers)
  • How to attract more customers.

When you start thinking through your strategies and tactics for new customers, you’ll recognise that again, this breaks down into two numbers.

Number of leads generated * % of leads converted

If you decide that you need to increase your new customer acquisition from 2 customers per week to 8 customers as part of your move towards your ideal sales and profits, you start to see insights into what you can do.

So if you get those 2 customers from 8 enquiries, you have a 25% conversion rate.

If you want to get to eight new customers:

  • You can look for ways to improve your conversion rate to 100% but that’s extremely unlikely;
  • You could look at increasing the amount of marketing you do or improving your existing marketing to increase your leads by a factor of four (from eight to thirty two each week); or
  • You could look at ways to improve both, say double the leads you get from eight to sixteen and double your conversion rate from 25% to 50%

The issue then becomes how do you do it?

Why don’t your leads convert at the moment (see Win Loss Analysis).

This isn’t the article to go into details.

My point is that by drilling into the numbers and understanding what it all means to set a financial goal, you start making the improvements you need to make much more specific and tangible.

It’s terribly vague to think in broad terms like “we want to get our sales revenue up to $1 million” or “we want to double the business”.

It doesn’t move you into action.

Specific numbers linked to action plans (with completion dates and allocated responsibilities) and firm intentions are needed.

This way you start managing your business intentionally as it moves towards set goals and targets.

You get clear feedback.

X is working, congratulations but can it be improved more?

Y isn’t working as well as expected. Why not? What can be done to make it work in the way you expected?

A Different Type Of Business Planning

This is intentional business planning and management.

I’ll talk more about that soon.

Similar Posts:

 Name: Email: We respect your email privacy 
{ 0 comments… add one }

Leave a Comment