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Doctors in the developing world measure their progress not by the aggregate number of children who die in childbirth but by the infant mortality rate, a ratio of the number of births to deaths.
Similarly, baseball’s
leadoff batters measure their “on-base percentage” – the number of times they
get on base as a percentage of the number of times they get the chance to try.
Acquirers also like tracking
ratios and the more ratios you can provide a potential buyer, the more
comfortable they will get with the idea of buying your business.
Better than the blunt
measuring stick of an aggregate number, a ratio expresses the relationship
between two numbers, which gives them their power.
If you’re planning to sell
your company one day, here’s a list of seven ratios to start tracking in your
business now:
1. Employees per square foot
By calculating the number of
square feet of office space you rent and dividing it by the number of employees
you have, you can judge how efficiently you have designed your space. Commercial
real estate agents use a general rule of 175–250 square feet of usable office
space per employee.
2. Ratio of promoters and
detractors
Fred Reichheld and his
colleagues at Bain & Company and Satmetrix, developed the Net Promoter
Score® methodology, which is based
around asking customers a single question that is predictive of both repurchase
and referral. Here’s how it works:
survey your customers and ask them the question “On a scale of 0 to 10,
how likely are you to recommend to a friend or
colleague?” Figure out what percentage of the people surveyed give you a 9 or
10 and label that your ratio of “promoters.” Calculate your ratio of detractors
by figuring out the percentage of people surveyed who gave you a 0–6
score. Then calculate your Net Promoter
Score by subtracting your percentage of detractors from your percentage of
promoters.
The average company in the United States
has a Net Promoter Score of between 10 and 15 percent. According to Satmetrix’s
2011 study, the U.S.
companies with the highest Net Promoter Score are:
USAA Banking 87%
Trader Joe’s 82%
Wegmans 78%
USAA Homeowner’s Insurance
78%
Costco 77%
USAA Auto Insurance 73%
Apple 72%
Publix 72%
Amazon.com 70%
Kohl’s 70%
3. Sales per square foot
By measuring your annual
sales per square foot, you can get a sense of how efficiently you are
translating your real estate into sales. Most industry associations have a
benchmark. For example, annual sales per square foot for a respectable retailer
might be $300. With real estate usually ranking just behind payroll as a
business’s largest expenses, the more sales you can generate per square foot of
real estate, the more profitable you are likely to be.
Specialty food retailer
Trader Joe’s ranks among companies with the highest sales per square foot;
Business Week estimates it at $1,750 – more than double that of Whole Foods.
4. Revenue per employee
Payroll is the number-one
expense of most businesses, which explains why maximizing your revenue per employee,
can translate quickly to the bottom line. In a 2010 report, Business Insider
estimated that Craigslist enjoys one of the highest revenue-per-employee
ratios, at $3,300,000 per employee, followed by Google at $1,190,000 per bum in
a seat. Amazon was at $1,010,000, Facebook at $920,000, and eBay rounded out
the top five at $530,000. More traditional people-dependent companies may
struggle to surpass $100,000 per employee.
5. Customers per account
manager
How many customers do you
ask your account managers to manage? Finding a balance can be tricky. Some
bankers are forced to juggle more than 400 accounts and therefore do not know
each of their customers, whereas some high-end wealth managers may have just 50
clients to stay in contact with. It’s hard to say what the right ratio is
because it is so highly dependent on your industry. Slowly increase your ratio
of customers per account manager until you see the first signs of deterioration
(slowing sales, drop in customer satisfaction). That’s when you know you have
probably pushed it a little too far.
6. Prospects per visitor
What proportion of your
website’s visitors “opt in” by giving you permission to e-mail them in the
future? Dr. Karl Blanks and Ben Jesson are the cofounders of Conversion Rate
Experts, which advises companies like Google, Apple and Sony how to convert
more of their website traffic into customers. Dr. Blanks and Mr. Jesson state
that there is no such thing as a typical opt-in rate, because so much depends
on the source of traffic. They recommend that rather than benchmarking yourself
against a competitor, you benchmark against yourself by carrying out tests to
beat your site’s current opt-in rate.
Dr. Blanks and Mr. Jesson
suggest the easiest way of increasing opt-in rate is to reward visitors for
submitting their e-mail addresses by offering them a gift they’d find valuable.
Information products – such as online white papers, videos and calculators –
make ideal gifts, because their cost per unit can be almost zero. Using this
technique and a few others, Conversion Rate Experts achieved a 66 percent
increase in the prospects-per-visitor rate for SOS Worldwide, a broker of
office space.
7. Prospects to customers
Similar to prospects per visitor,
another metric to keep an eye on is the efficiency with which you convert
prospects – people who have opted in or expressed an interest in what you sell
– into customers.
Conversion Rate Experts’ Dr.
Blanks and Mr. Jesson recommend you monitor the rate at which you are
converting qualified prospects into customers, and then carry out tests to
identify factors that improve that ratio. Conversion Rate Experts more than
doubled the revenues of SEOBook.com, the leading community for search marketers,
by converting many of SEOBook’s free subscribers into customers. Techniques
that were found to be effective included (perhaps counter intuitively)
restricting the number of places available; allowing easier comparison between
SEOBook and the alternatives; communicating the company’s value proposition
more effectively; and simplifying its sign-up process. The trick is to
establish your benchmark and tinker until you can improve it.
Acquirers have a healthy
appetite for data. The more data you can give them – in the ratio format
they’re used to examining – the more attractive your business will be in their
eyes.
Wondering if you have a
sellable business? The Sellability Score is a quantitative tool designed to
analyze how sellable your business is. After completing the questionnaire, you
will immediately receive a Sellability Score out of 100 along with instructions
for interpreting your results. Take the test here:
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