Businesses are about converting
something into something else. Whether
it is converting revenue into cash, prospects into customers or subscriptions
into relationships, knowing how well you are doing is a key to having
sustainable success. Successful
conversion rates are defined by their downstream impact on the health of the
business. If your conversion rates
aren’t visible to you, their sway will be in the form of cash flow issues,
declining sales or higher levels of customer attrition.
Many of the organizations I have
worked with could guess at best as to what their conversion rates were. Those that could guess weren’t sure what
information was available to confirm their estimation. All of them were aware of problems in regards
to cash flow, customer satisfaction, new customer growth, revenue stagnation
and process issues. Increasing the
visibility to conversion metrics allows for the correlation of organizational
concerns to the visibility of the root problems and viable solutions.
Because for so many businesses,
CASH IS KING, we can use cash conversion rates as an example. The first step is defining when the process
starts. In most cases, the process
starts when the sale starts, i.e. when the customer commits to a purchase. Once that starts, there are a series of
events that occur including but not limited to:
Order Placement, fulfillment, shipping, billing, collection and
deposit. In this case, there will be a
time period between each step.
Adding up all of the time periods
will give you the amount of time it takes to convert a sale into cash. The average of those transaction times will
give you your average conversion rate which can be compared to the amount of
time it takes you to pay for your COGS.
If it takes you longer to get your cash than it does for you to pay for
to goods, you have a negative conversion balance which means you are floating
the money for your business. Unless you
are a bank and can charge interest on these transactions, you have an
unbalanced scenario which leaves your business holding the bag.
Whether it is cash or any other
conversion variable, understanding your metrics is the key to coming up with
action plans to address any misses. In
the cash example, if you aren’t able to track the time between each step, you
aren’t able to confirm your conversion rate.
This creates an inability to effectively improve your process or your
results.
The first step, as it is so many
times, is admitting there is a gap in your information. Once you have done that most difficult step,
the next ones come much easier.
Step 1. – Determine the key components
of conversion. Make sure they are
quantifiable and consistent across the majority of your transaction scope.
Step 2. – Once you have determined the
individual components of your transaction ensure that you have a consistent way
of tracking each one. Make sure that
your information is quantifiable and can be gathered in an efficient and
consistent way.
Step 3. – Collect your data. Depending on the size of your organization
and the number of transactions you complete, the period before you have usable
data may take a while. It is important
that you exercise patience here and understand that pushing the issue or trying
to affect the data before it has time to come in may have a detrimental effect
on the outcome.
Step 4.- Organize and analyze your data. By placing the date in a consumable format
that is easy to read and understand, you will have a simpler time creating your
roadmaps for success.
Why does this matter? Beyond the financial and organizational
impact of not knowing what your conversion rates are, if you can’t see them,
you can’t fix them.
Having the information is only
the first part, but now that you have it, you can create actionable plans to
improve the results. The beauty of
having good information is the ability to create good plans from it. Taking each section of your conversion
process, you can determine which parts need more work than others. In the case of the cash example, if it is
taking you 15 days to create an invoice after the product is ordered, that
might be an example of an area of opportunity.
From there, you can look at your process to figure out how you can
create more efficiency in order to have a more positive outcome.
Organizing your action plans to
address one or two issues at a time will have a better long term impact than
trying to fix all of your issues at once.
I have found that picking two at a time is usually the most
efficient. Take one of the biggest areas
of improvement and one of the smallest and tackle those first.
By creating a data driven matrix,
you have given your organization the clear visibility to where you are
currently (actuals), the ability to determine where you should be (benchmarks/goals),
the variables you want to track (KPIs), and the possibility to create a clear
path to improve them (action plans): all of the things a successful
organization needs to be efficient and sustainable.
