Six Power Ratios to Start Tracking Now
Six Power 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, cricket batters and bowlers measure their “average and strike rate” – the average runs per innings or conceded for each wicket – as a percentage of the number of times they had the opportunity to try.
Acquirers also like tracking ratios, and the more ratios you can provide to potential buyers, the more comfortable they will become with 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 six ratios to start tracking in your business now to start building value:
- Employees per square foot
By calculating the 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.
- Ratio of promoters and 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 predicts both repurchase and referral.
Here’s how it works: survey your customers and ask them, “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 your ratio of “promoters.” Calculate your ratio of detractors by determining 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 in the United States has a NPS of between 10 and 15 percent. Reichheld found companies with an above-average NPS grow faster than average-scoring businesses.
- Sales per square foot
By measuring your annual sales per square foot, you can understand how efficiently you translate your real estate into sales. Most industry associations have a benchmark. For example, a respectable retailer's annual sales per square foot might be $300. With real estate usually ranking just behind payroll as a business’s most significant expense, the more sales you can generate per square foot of real estate, the more profitable you will be.
- Revenue per employee
Payroll is the number one expense for most businesses, which explains why maximizing revenue per employee can quickly translate to the bottom line. Google, for example, enjoyed a revenue per employee of more than $1.5 million in 2021, whereas a more traditional people-dependent company may struggle to surpass $100,000 per employee.
- 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 the correct ratio because it is 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.
- Prospects per visitor
What proportion of your website’s visitors “opt-in” by permitting you 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 converting more of their website traffic into customers. Dr. Blanks and Mr. Jesson state there is no typical opt-in rate because so much depends on the traffic source. 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.
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.
