Introducing the Power of the Business Pentagon
Today, I am going you introduce and show you the power of the Business Pentagon, which is effect of 5 essential numbers or business multipliers in your business that when combined will have an exponential effect on the value of your business … beyond your wildest dreams.
Increasing individually each of these business multipliers will increase your business geometrically (that is a straight line growth) but increase all of these business multipliers together even by a small amount will result in exponential growth (Growth to the power of 5).
Now you may have already heard of some of these concepts and multipliers before but I want to show you today the effect of just increasing each of the multipliers by a small percentage.
So the 5 Multipliers are:
- Increasing the Number of Leads
- Increasing the Conversion Rate of Leads into Sales
- Increasing the Average Sale Value
- Increasing the Gross Profit Rate
- Increasing the Valuation Multiplier
Now we only require small increases to each of the 5 multipliers to achieve exponential growth.
So let’s look at the position of a typical small business and see how their business can be improved.
The first business multiplier is the number of leads and in this example we are going to assume that the business has 2,000 leads per year. Now leads can be measured in a number of different ways the number of subscribers, the number of phone calls, the number of enquiries, the number of people who ask for a quote.
There are a number of ways that you can measure leads in your business and every business will be different. The important aspect of defining leads is that it has to be able to be easy to measure.
This business converts just 20% of those 2,000 leads into sales. so that equals 400 sals per year.
Now lets go to the 3rd Business Multiplier which is the value per sale, which we are going to define as the average invoice value.
We are going to assume that the average invoice value is $2,000, a reasonably high end item. So 400 sales at an average invoice value of $2,000 equates to annual sales of $800,000 per year.
SO lets go to the 4th Business Multiplier which is gross profit. Now we are going to use a slightly different definition that you are use to because we are going to include the costs of leads, the cost of conversions as well as the cost of goods sold.
In this instance we are going to assume a fairly standard gross profit rate of 50%, which gives us a gross profit of $400,000.
We are going to assume that expenses of the business, including an owners salary are around $350,000 per year, giving us a profit of $50,000 per year.
The 5th Business Multiplier – the Valuation Multiplier. We are going to talk about the valuation multiplier in more detail in future videos but most small businesses have a valuation multiplier of between 1 and 4.
We are going to that this business has a valuation multiplier of 2, which is at the lower end of small business multipliers. This gives us a business value of $100,000.
Time for the Power of The Business Multipliers
Now we are going to increase each of these multipliers by 10%. We are going to increase the number of leads by 10%, there iss a number of ways that we could do that – have better referral systems, advertising or more leads from our website. there are a number of different ways that we can increase leads, but we are only looking at having 10 ideas that result in 1% increase in leads per year.
and we are going to get a little better at selling, improve our proposal documents, improve our authority and stature that we are presenting to our clients and increase the conversion rate by 10% to 22%.
So now we have increased the number of sales that the business has made from 400 to 484.
But we are going to take that one step further and increase the average sale value by 10% from $2,000 to $2,200. We could do this by increasing prices, or upselling or cross selling. We are looking at a number of small increases that lead to a 10% increase in sale value.
Sales have increased to $1,064,000
But we are going to take that one step further and increase the gross profit rate by 10% from 50% to 55%. We have achieved this by being more efficient with our marketing and eliminating poor performing or ineffective advertising campaigns. We are now measuring what works and what doesn’t.
We have for the purposing of the exercise increased expenses by 15% becuase the business is a little bigger. So the profit of the business with just small incremental increases has improved from $50,000 per year to $184,000 per year, an increase in profit of 266%
But there is still one more multiplier and because the business is a little mor efficient better management, systems and more profitable, we have increased the valuation multiplier from 2 to 2.5.
The business is now worth $460,000 from $100,000, an increase of 360%.
But lets go further because this is about continual improvement and lets look at what happens in the second year by increasing each of the multipliers by just a small increase.
So we have increased leads by 10%, increased the conversion rate of those leads by 10% to 24%. As the process of measuring, testing, creating systems to improve the number of leads and the rate of conversions, the gross profit rate also improves. We now have a business with $1.4 million in sales and almost $400,000 in profit and the business is now valued at $1.2 million.
But we can take this further again, because the process is about continual improvement, so in the third year we increase leads, conversions, sales value and gross profit by 10% and this results in a business with $723,000 in profit and a value of $2.5 million.
Now we are starting to get exponential growth. The business increasing from $100,000 to $2.5 million in three years, but the process continues so lets look at the fourth year.
Now we have a business worth $4.9 million with a profit of $1.2 million.
So we have now seen how we have taken a business that was barely getting by to a business worth almost $5 million in 4 years – all by small changes, continual incremental improvements to the business. There was no drastic increases in any of the 5 multipliers in each year. But imagine what you could do if you did get a massive increase in one or all of the multipliers.
Over the next 5 videos, I am going to go into more detail and discuss ideas that you can put in place to improve each of the 5 multipliers. So stay tuned and I look forward to discussing with you how to increase the number of leads to your business.
Watch the Next Videos in The Series