In recent years, many businesses have been reporting an increase in sales revenues. However, the truth of the matter is that this increase may not be as significant as it appears. The reason behind this perceived growth is often due to inflation and the rise in prices, not actual sales.
Inflation can cause the value of currency to decrease, and as a result, businesses may raise their prices to maintain their margins. This leads to an increase in revenue, but it’s important to note that the increase is only due to higher prices and not actual sales.
So, how can we determine the true state of sales revenue growth in an inflationary period? The answer lies in focusing on quantities and units, rather than dollars. The number of goods sent out the door, or the billable hours for service firms, are the real metrics that define growth. These quantities are not subject to inflation and provide a clearer picture of sales success.
During inflationary periods, businesses may struggle to maintain their profitability and grow. This is because as the value of money decreases, the cost of goods and services rises, and consumers may start to cut back on their spending. For business owners who are looking to scale their business during such periods, it becomes even more crucial to dig into sales revenue numbers and focus on the true metrics of growth.
One of the most important metrics to focus on during inflationary periods is quantities. Business owners should pay attention to how many products or services they are selling, as this can help them gauge their true sales performance. While looking at revenue alone may seem like a good way to measure success, it can be misleading during inflationary periods. For example, if a business increases its prices due to inflation, it may see a boost in revenue without actually selling more products or services. By focusing on quantities, business owners can see if they are actually selling more or if the increase in revenue is simply due to price increases.
Another important metric to focus on during inflationary periods is units. This is similar to quantities, but focuses specifically on how many units of each product or service are being sold. For example, a business may sell 100 units of a product in a month, but if it starts selling 200 units the following month, that is a sign of growth. By tracking units, business owners can see if they are moving more products or services, which is a key indicator of growth.
Time is also an important metric to focus on during inflationary periods. Business owners should pay attention to how long it takes to sell products or services, as this can indicate how well they are performing in the market. If a business is selling products quickly, it may be a sign that the market is responding well to their offerings. On the other hand, if products are sitting on the shelves for a long time, it may be a sign that the market is not interested in them. By tracking time, business owners can see if their products or services are in demand, and make adjustments accordingly.
Finally, pricing is an important metric to focus on during inflationary periods. As the cost of goods and services rises, businesses may need to increase their prices to maintain their profitability. However, it is important to find the right balance between pricing and sales. If prices are too high, consumers may start to look elsewhere for cheaper alternatives. On the other hand, if prices are too low, business owners may not be able to cover their costs. By tracking pricing, business owners can see if they are pricing their products or services correctly and make adjustments if necessary.
I was recently approached by a business owner with a scaling question that required the application of these metrics. The example involved a retail store that found that the number of sales transactions has increased year over year, but the average sales transaction has decreased. The owner had thought the problem to be a sign that customers are becoming more price-sensitive and looking for lower-priced items. Rather than just assume something out of her control was happening to explain the changes, the business owner re-focused on how many units were being moved, how long it took to sell them, and any changes in pricing that had occurred during the periods of review.
This analysis helped identify high-performance products and the real problem that certain products were over-stocked while others were being under-stocked. Over-stocking can lead to excess inventory that may need to be discounted, while under-stocking can lead to missed sales opportunities.
The data analysis also lead to pivoting her marketing strategies, and re-training her staff on upselling and cross-selling techniques. By the way, customer retention rates, sales by product category, sales per square foot, and gross margin analysis also provided valuable insights into sales performance and helped business owner make data-driven decisions.
During inflationary periods, business owners need to focus on the true metrics of growth to measure real sales success. This includes quantities, units, time, and pricing. By looking at how many products or services they are selling, how many units are being moved, how long it takes to sell them, and any changes in pricing, business owners can gain a more accurate understanding of their sales performance. In the case of a retail store, this may involve reviewing pricing strategy, identifying high-performance products, streamlining inventory management, evaluating marketing strategies, and training staff for upselling and cross-selling. This information can then be used to make adjustments and grow their business, even in the face of inflation.
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