By Bryan Orr
Have you ever read the book “Moneyball” by Michael Lewis? I would highly recommend it as required reading for small business owners.
The book covers the career of Billy Beane, specifically his transformation of the Oakland A’s baseball organization, using an innovative analysis of baseball statistics called “sabermetrics.”
The core premise of his success is using hidden but superior numbers to scout players and put them in a position to win at a discount. This new way of looking at player and team stats resulted in the A’s being competitive with teams that had a player payroll of double their own.
Most small businesses are in a constant fight for survival against larger, and sometimes smaller competition. The larger companies have larger marketing budgets, more staff, and better infrastructure. In some industries there are also smaller competitors who have zero overhead costs and don’t play by the same set of regulatory rules as a business with employees.
The “Moneyball” advantage is looking carefully at the data you can collect and beginning to track the information that allows you to make better decisions than your competition. These may include the typical statistics like profit margin and overhead percentage, but often the useful metrics are more subtle, or they may be a combination of stats.
Here are the places I suggest you look for your money metrics.
In my opinion, the days of the long form customer satisfaction survey are over. The best customer satisfaction polls I have seen have a green smiling face on the left, a yellow face with the mouth straight across in the middle, and a red frowning face on the right. If you, the customer, click the yellow face or the red face it asks if you would like a call from a manager.
If you want a low-tech solution, you can have someone call customers after a day or two and simply ask if everything went according to their expectations and if there is anything you could have done to improve their experience. If you don’t have time to do that, you could hire someone to make these calls once or twice a week for just a few hours.
This type of simple customer satisfaction survey can then be tracked to the products they purchased and / or the employees they interacted with to come up with an employee and product satisfaction score that will show you a trend over time that you can compare against other employees and products.
Profit Per Product / Service
Gross revenue means very little; profit is all that matters to a business because it is the only thing you get to keep at the end. For each product or service you offer, you need to have a handle on the following to calculate profit per product / service:
- Gross material / product expenses (how much does the stuff cost you with tax included)
- Costs to land (shipping costs to get it there, labor costs to unload it, fuel to drive somewhere to provide it)
- Direct Labor (costs to provide the good or service, sales commissions etc…)
- Retail Price (what you charge for it)
So the calculation looks like:
Retail Price – Gross Material Expenses – Costs to Land – Direct Labor – Overhead = Profit
The trickiest part is calculating overhead but the best way to do it is to look at your prior quarter P&L (profit and loss) or the same quarter last year and divide all of your overhead expenses by your materials / product expenses if your business is retail, or, divide by direct labor if it is primarily a service business.
Based on the cost of the particular product or labor, you would simply multiply by the result of the prior equation.
Fidget Spinner Gross Product Expense = $1.00
Cost to Land = $0.25
Direct Labor = $0.25
Prior Quarter Total Overhead = $20,000
Prior Quarter Total Product Expenses = $35,000
20,000 ÷ 35,000 = 0.571
$1.00 (gross fidget spinner expense) x 0.571 = $0.57 of overhead per product
In this example the total cost would be $1.00 + $0.25 + $0.25 + $0.57 = $2.07
Depending on your business, there can be thousands of metrics to choose from. Warranty return rate, callback rate, lost or damaged materials, shrinkage (theft), profit per hour, billable per hour, employee satisfaction, and many more.
The real magic happens when you can compare data sets against one another to see which ones track with profitability and which do not. This all starts by looking at historical data and comparing profitable periods against less profitable and see what trends are occurring.
You may be surprised by what you find.