There are three metrics of business success that breakthrough businesses focus on:
- Are we accelerating our business growth?
- Are we profitable?
- Are we creating value?
These three metrics of business success — growth, profitability and productivity — form the foundation of business success. And they form the core of the content we will be producing for our members and the topics we will be writing about here. So let’s talk briefly about them before we introduce each metric in more detail in separate articles.
Curious how we came up with these three levers of success? Read our blog.
The first of the three metrics of business success is growth. At a fundamental level, there are two basic business growth strategies: you are either looking for a lifestyle business or a growth-oriented business. In either case, however, it all starts with an idea. From there, you need to ask yourself a few questions. Keep in mind, there are no wrong answers to these questions.
- How much energy and time are you devoting to this idea? Is it an all-consuming passion, or is it a clever idea that you think could make you some money? If you are willing to go “all-in” on your idea, then you are a candidate for a growth-minded business. If, on the other hand, you want to maintain a reasonable work-life balance so you can pursue other (perhaps non-business-related) passions, you may want to consider more of a lifestyle business — one that trades higher profits for a higher quality of life.
- Are you good at delegating and “letting go”? If you are, then a growth-minded business strategy will work well for you. If not, stick to a lifestyle business because you cannot succeed at a growth business by micromanaging your employees or trying to maintain 100% control. It just doesn’t scale — for example, you will not get outside investors on board without giving up some control.
- Do you want to make a product or service, or do you want to run a business? Are you business-savvy, or just really good at creating value? Even lifestyle business owners have to spend a certain amount of time worrying about basic operations like invoicing, collections, accounting, reporting, etc. And the moment you decide to hire someone to help that workload doubles. But growth business owners typically spend a lot more time writing business plans, pitching investors, dealing with complicated business negotiations and other business management tasks than their lifestyle counterparts — unless of course their delegation skills allow them to trust someone else enough to help them run their business so the owner can focus on the work they like most.
Now, it is a truism in economics (and life for that matter) that once you stop growing, you start dying. Thus, growth is an imperative — up to a point. Where that point is depends largely on the next two metrics.
The second of the three metrics of business success is profitability. Profitability is, simply put, the difference between costs and revenue. It is, at its heart, a measurement of efficiency. Note that efficiency and productivity are fundamentally different concepts, although they are often considered synonymous is everyday casual usage. Productivity is measurement of output and impact. It ignores inputs — how much effort it takes to produce the goods and create the value you offer. Efficiency takes these into consideration, and thus is a much broader concept than productivity. The significantly wider variety of factors that go into calculating profitability make it much more difficult to calculate (COGS anyone?), and thus more difficult to achieve. But it must be done. Here at the Business Breakthrough Network, we’ll spend a lot of time on this metric.
Generally speaking, there are three ways you can increase your profitability. Generally speaking, you need to combine at least two of these strategies in order to effect change:
- Reduce Your Costs. Reducing variable costs can be a simple and quick way to reduce cash outflow, and potentially increase profitability. There are also fixed costs that can be analyzed and, in many cases, converted to variable costs that can also improve your cash flow and potentially increase profits.
- Increase Your Price. This seems obvious, but remember the supply curve you learned in microeconomics: increasing the price will push down demand, which means you will sell less of your goods or service. If your fixed costs are relatively low compared to your variable ones, then you are more likely to be able to maintain profitability at that new supply/demand equilibrium. To work best, you must be able to demonstrate your value.
- Increase Demand For Your Product. Think of this as the Steve Jobs approach. This requires education, psychology and branding expertise. It is the strategy over which you have the least control, but which has the highest potential for profit maximization. It’s the magic of marketing.
Now that we’ve tackled profitability, let’s move on to our last metric: productivity.
The third of the three metrics of business success is productivity. It’s easy to think of business productivity just in terms of how much you get done each day. That is certainly part of the productivity equation, and we’ll cover this aspect frequently here. But we encourage you to think bigger. Our definition of productivity includes both purpose and utility: are you doing something that will make the world a better place, and are you making something that has value?
Note that this approach separates profit from purpose: your goal should not be to make lots of money! Your goal should be to build and deliver a product or service that adds real value to, and makes a real difference in, somebody’s life — ideally more than one person’s life. Let’s cover each of these two aspects separately.
- Finding Your Purpose. We’re at a difficult time today. As I write this, we are just starting to emerge from what we hope isn’t just the first wave of the COVID-19 pandemic. Advice is flowing freely on how to deal with the crisis, and on how to rebuild (we’re hosting our own event next week on this very topic). Believe it or not, having a clearly defined purpose for your organization can actually serve as an early warning sign for future crises. By constantly being attuned to your vision, you will find it much easier to become aware of potential impediments to achieving that mission—one of the leading indicators of an impending crisis. It’s also much easier to motivate your employees, and much easier to sell your product or service. Purpose is separate from profitability, but it can also drive profitability.
- Creating Value. “Utility” is one of those terms the economists love to use, and it’s typically defined as “the total satisfaction that a consumer receives from a good or service.” Economists also love to assume that consumers behave entirely rationally, constantly striving to maximize utility (and of course the natural corollary to this: that businesses also behave entirely rationally, constantly striving to maximize profitability). This economic philosophy/model even went so far as to create a term for this supposedly perfectly rational consumer: homo economicus (“economic man”). Of course today, behavioral psychologists have influenced economics enough that there is such thing as a “behavioral economist,” and they of course would argue that humans can stray quite far from this idealization. Nevertheless, utility is still a, well, useful idea. It is the value (perceived or calculated) attributed to your offerings, and thus can have a direct impact on the demand for your goods or services, which thus can influence the price you are able to set.
We hope you’ve enjoyed this brief explanation of the three metrics of business success that we care about most here at the Business Breakthrough Network. Stay tuned for much more on each.
What has your experience been like with each of these? Have you found one easier or harder to manage than the others? Where have you seen your greatest successes? your hardest struggles? Let us know in the comments below!