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7 POWERFUL BUSINESS RATIOS TO START TRACKING NOW
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 lead-off 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.
percentage of the number of times they get the chance to try.
To the degree you intend to sell your martial arts school now or in the future, 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.
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.
numbers, which gives them their power.
Here’s a list of 7 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 <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 0–6 score. Then, calculate your Net Promoter Score by
subtracting your percentage of detractors from your percentage of promoters.
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 <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 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%
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
expense, 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.
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
expense, 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.
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.
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 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.
Blanks and Ben Jesson are the cofounders of Conversion Rate Experts, which advises companies like Google,
Apple, and Sony 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.
Dr. Blanks and Mr. Jesson suggest the easiest way of increasing the 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.
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.
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 counterintuitively) 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.
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 counterintuitively) 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.
Written by: Michael Graff
