Issue 2.1 | August 2010
In this Article: there are many ways to drive revenue, but only one is optimal for your company.
by Jonathan Wilson
Anyone who lives in a large city like greater Toronto, Los Angeles or Johannesburg will know that commuting is that part of your business routine that comes straight from hell. It taxes your time, energy, and resources. Even listening to pod-casts or catching up on business calls does not compensate for those testing hours spent in a world of concrete, car fumes and various (often frustrating) red lights. While all roads may lead to Rome, not all will expedite your journey there. There is an optimal route, and every commuter is delighted when they find one.
There is a similar principle at work in your business. There are many ways to drive revenue, but only one is optimal. This is not the promise of some magical silver bullet: your optimal road to profitability is a precise economic formula based on the truth about your business’ core dynamics and how they integrate with dynamics in the market.
As I’ve explained in the past, performance optimization lies in accurately defining the soul—or core—of your business. Three drivers make up your company’s soul: motivational, aptitudinal and financial. Each speaks to a key fundamental of organizational performance. Motivation is the emotional component (why we do what we do that no-one cares about as much as we do), aptitude is the talent and resource component (how we do what we do that no-one does as well as we do), and the financial driver is the economic component (what and how others pay that most demonstrates the value of what we do).
Researcher Jim Collins found that a precisely defined financial driver was one of several critical success factors in businesses that, over fifteen consecutive years, outperformed the market by at least four times. He posed his finding as a question: “If you could pick one and only one ratio—profit per X—to systematically increase over time, what x would have the greatest and most sustainable impact on your economic engine?” (Good to Great, 2001: p.104).
Driven by Truth, Not Assumption
The initial assumption of many companies I have worked with is that their profit is per customer. But while the buyer is essential to your profitability, more important in attaining optimum profitability are the dynamics that drive their purchase. For example, I worked with an online media bank that assumed its profit was per customer (under which lay a more basic assumption; that profitability was per image, video, etc, in its database). Acquire the libraries of as many good contributors as possible, promote our extensive and accessible database, and we maximize sales, or so the logic went.
However, a consideration of this company’s soul caused us to rethink their profit per X assumption. We realized that its greatest revenues were through customers who were buying, not just individual media items, but collections of media. Most often, customers were building a story for a magazine or news production or even a business presentation. The media bank’s profit was not per customer or per unit, but per collection. This allowed them to harness their already exceptional IT talents (another part of their soul) to tag media with keywords that linked each image, story, etc to as many and as diverse a set of collections as possible (to protect this company I have omitted other, equally powerful elements of its three drivers which further distinguished this company from its competitors). Naturally, this simple insight exponentially multiplied their profit potential.
To identify your profit per X formula requires a distillation process – a disciplined analysis that gets you to the bed-rock of your business. You will find the formula in that dynamic interplay between what motivates your company, the aptitudes it brings to the table and the way its value is best harnessed in the market. What your financial driver is will not be the same as that of your direct competitor—if it is, you have not yet uncovered what truly sets your company apart (nor has the soul of your company been accurately defined if the three drivers do not seamlessly integrate—they must be mutually reinforcing, otherwise they will pull your company in opposing directions). One drug store may maximize profitability per region, based on ratios of store to population density. Another, per customer visit (based on convenient store sites). One bank (or division) may find its profit is per product, while another is per financial advisor (where banking is a commodity best leveraged by relationships of trust). Other formulae include: per consumer brand, per division, and per stakeholder.
Determining your financial driver is key to designing an effective marketing and sales process. It will provide you with a clear basis for reducing uncertainty in how to allocate your precious resources. And it will give you the right set of measurements for assessing your performance. Determining your financial driver might seem as demanding as finding your way through the maze of available routes to get to your commute destination. But a smart commuter taps into a vast array of information available to chart their optimal route. Some of this is “internal”: fuel levels, the condition of the car, or of the driver. Other data refers to the externals: weather, traffic flow, road-works, etc. In the same way, a smart company will study the internal and external data carefully to determine the optimal route to profitability.
Another soul insight from www.soulsystems.ca.
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