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. An approach which changed the competitive landscape of baseball and transformed the fortunes of one of the poorest clubs in the league - more of which later.
Acquirers also like tracking ratios, and the more ratios you can provide a potential buyer, the more comfortable they will become 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 to start building value:
1. Ratio of promoters to detractors
Fred Reichheld and his colleagues at Bain & Company and Satmetrix developed the Net Promoter Score® methodology. It is based on 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 <insert your company name> 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 score of 0 to 6. Then calculate your Net Promoter Score (NPS) by subtracting your percentage of detractors from your percentage of promoters.
The average company has a NPS of between 10 and 15 percent. Reichheld found companies with an above-average NPS grow faster than average-scoring businesses.
2a Sales per lead
In one of the businesses I ran, we measured the sales per new lead generated. This included leads from our website and visitors to our stores. That way we could tell how many leads our advertising needed to generate to hit sales budget. And it gave us a future estimate of the income we could expect from new leads generated in a week (we measured the SPL over a 3-month timeframe). If you’ve a pure ecommerce business, measure the sales per visitor to your website.
2b. Sales per square foot (if you’re a bricks & mortar retailer)
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 property costs often ranking just behind payroll as a business’s largest expenses, the more sales you can generate per square foot, the more profitable you are likely to be.
3. Revenue per employee
Payroll is the number one expense for most businesses, which explains why maximising your revenue per employee can translate quickly to the bottom line. Google, for example, enjoyed a revenue per employee of more than $1.5 million dollars in 2021, whereas a more traditional people-dependent company may struggle to surpass £100,000 per employee.
4. 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.
5. 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 and Apple on 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.
6. LTV to CAC
This is mainly used for businesses which sell subscriptions (examples include software, consumables, training programs, and membership sites). LTV stands for lifetime value of the customer and is an estimate of the average revenue that a customer will generate throughout their lifespan as a customer. CAC is the cost of gaining a new customer. As a general rule of thumb, an LTV:CAC of 3 is good, but it depends on your industry.
7: Sales conversion rates
Ok, this is a big catch-all, but if you can tell how well you’re converting at each stage of your sales funnel, you’ve got a winner. It's a fantastic way to identify and fix sales problems early, to benchmark and create competition between salespeople, and to accurately predict future sales income.
So, to wrap up...
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.
Even if you’re not considering selling, measure and manage these seven ratios. They’re a key part of building a more robust and valuable business that can run (mostly) without you. The baseball team that I mentioned at the start was the Oakland Athletics, managed by Billy Beane, and their story has been immortalised in Moneyball, well worth a read to understand how that one measure changed baseball for ever.
Which, by the way, is what I help owners do - increase the value and sellability of their business. So they have choices. The choice to sell the business for a premium at a time of their choosing, or to run it as an active investor without being involved in the day-to-day, or to scale it and join the 1% that get to 8-figure businesses.
Anyhow, book some time in my diary here if you want a chat about what it takes to create those choices for yourself.