Hey there, small business owners – let’s talk about revenue!
Now, a lot of people make the mistake of thinking revenue is the same as sales. Obviously, since I used the word “mistake”, they are wrong. [Disclaimer: this is not a finance class. This is not the way your accountant will define “revenue.” But it’s the best way for a small business owner to think about revenue!]
Revenue is basically a formula. It’s algebra, but the easy kind.
Revenue has five components:
- the number of potential targets per month (the legit ones that actually might buy, not just everybody who sees your ad or your post) – let’s call this p.
- the conversion rate of potential targets to actual transactions. Let’s call this c – it’s a percentage, but it might be easier to express as a decimal. So if you have 100 potential targets in a month and 35 buy from you, c = .35.
- the average sale in the month. This is going to have to be s.
- there’s the average time it takes to complete a transaction, from potential target to completed sale. I’m calling this t. It might represent hours or days, depending on your business.
- finally, there are your average related expenses per transaction, which I’m calling e. This includes your product costs and advertising, for example.
All of these things work together in relationship to each other and the overall relationship represents your revenue. It works like this:
p x c x s / t + e ~ Revenue
In words, take the number of potential targets and multiply that by your conversion rate. Then multiply that by the dollar amount of your average sale. Okay, all of that becomes your numerator – the top of your fraction. (p times c times s)
Then add the time it takes to make a sale to the expense of the sale. That becomes your denominator – the bottom of your fraction. (t + e)
This is where people get freaked out!
It’s a simple fraction. Now, you know from nearly every pizza you’ve had that 1 slice of 8 (1/8) is not nearly as much pizza as 6 slices out of 8 (6/8). All you want to do here is get the total top number as close as you can to the bottom number – or more! (That would be like 9 slices out of 8? Or maybe 9 pieces out of 7? Magic pizza!)
This fraction doesn’t equal your revenue! (See my disclaimer at the top.) But it has a very proportionate relationship with your revenue because a change to any one of these components will have a proportionate affect on your revenue.
There are five ways to increase revenue:
- you can increase the number of potential targets. Of course, if this is the only thing you do, your conversion rate might decrease, and nothing will happen. So be selective with your ads!
- you can work to increase your conversion rate, so that nearly every potential target ends up completing a transaction.
- you can increase sales.
- you can decrease the amount of time it usually takes to make a sale. Learn to close more efficiently or simplify your sales funnel, perhaps.
- and/or you can find ways to reduce your costs.
Okay, are we cool here? Revenue is way more than sales and marketing gurus say it is. And as a business owner, you probably already know that, but I don’t want you to fall victim to their mantras that revolve almost entirely around sales tactics. There are – very clearly – five areas that could affect your revenue, and sales is just one of them!