R = P times Q

by Rick Braddy on January 19, 2009

in Leadership

I still receive a lot of email traffic from Internet marketers these days. However, like most folks, I only read a subset of what I get – usually from those who deliver consistent value – like Marlon Sanders, for example.  This past week, Marlon’s newsletter included an interesting write-up on how one of his associates figured out a way to generate a $3 profit, then do it 700 times a day (that’s $2,100 a day in case you haven’t had your first cup of coffee yet).

His main points were: 1) find a market, 2) find a way to turn a consistent profit in that market, and 3) find a way to scale that process up and do it as many times as possible.  Well, that’s good advice, and it’s the basis of any multi-million dollar business.

This simple formula can be used to mathematically express this as:  R = P * Q,

where R is “Revenue”, P is “Price” and Q is “Quantity”.  It’s common sense for any seasoned business person, marketer or sales manager.  Where it becomes interesting is when you begin to break down the terms “P” and “Q” a bit further, for your business, and truly understand what’s driving (or should be driving) your revenue.

Price is typically easier to understand.  We sell an item at price P.  How can we increase our revenue?  One way is to increase P by any number of means (up-selling, cross-selling, bundling, post-transaction offers, continuity programs, etc.)

For most businesses, the biggest opportunity actually resides in finding ways to “amplify” the Quantity or volume of sales.  For more traditional businesses, this often involves adding more sales and marketing capacity (e.g., hiring more sales people, adding telesales, attracting more resellers, expanding to new territories or markets, etc.).

For online businesses, increasing Q usually involves driving more “QT”:  Qualified Traffic.  So, we can express our online sales volume this way:

 Q = QT * CR

where CR is “conversion rate”.  Obviously, this is why it’s so important to measure and optimize our online sales process conversion rates, as they directly drive the Quantity of sales we make.

The biggest opportunity for increasing our sales comes from “QT” – bringing more Qualified Traffic into the front-end of our sales funnel; i.e., our landing pages, sales pages, product pages, etc.

How much Qualified Traffic do you need to generate the kind of revenue you need?  Do you have a financial model that includes your conversion rates and traffic requirements?   If not, you can use the Online Business Gameplanner spreadsheet tool, which will save you a lot of time with the proper planning.

I would urge you to think carefully about what drives “Q” and “QT” in your business – and write it down.  See if you can create your own equation that shows how your sales volume is generated today.  Then, think about all the ways you could increase the terms that drive the “Q” in your business, and look for ways that you can scale Q faster and with more leverage or amplification.

By “leverage or amplification”, consider this example.  The radio signal you receive in your car is very, very faint, yet our car antenna picks up this signal.  The car radio then amplifies the signal (after it extracts the music from the FM carrier wave signal).  You then use the radio’s volume control to set the desired listening level.

In order for the car radio to work, there are many stages of amplification that take place.  So, what are the “business amplifiers” in your business and where are the “knobs” set?  What can you do to increase the volume level, turn up those knobs and drive more volume or “Q” in your business? 

Leverage results when you are able to put a nominal amount of effort in and get multiples of results out of that business amplifer.  For example, a reseller channel provides lots of business leverage and amplification, because it only takes a few people to acquire and manage a reseller account, and each reseller can drive many sales on your company’s behalf.  The same is true for online affiliates.

So, can you describe your business success and growth equation in R = P * Q terms?  If so, what are your ideas for gaining more business leverage?  I’d love to hear your perspective.

 

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