We have developed a simple methodology for looking at our marketing and business development options and have called it NEAT, which stands for:
- Number of Customers
- Efficiency %
- Average Sale $
- Transaction frequency
You can look at NEAT from a whole business perspective or on a business unit basis, if required. It is usually done on an annual basis.
Number of Customers simply stands for the number of Active Customers in your business. In most businesses active customers will be those that have purchased off you in the last year or two. In high turnover businesses , eg. NewsAgents, active customers could be those that have purchased off you in the last 3 months. In the building industry, it could be people that have purchased off you in the last 5 to 10 years.
In any case, count or estimate the number of active customers in your business. You can usually get this information from your bookkeeping systems although in a retail environment this maybe difficult, so estimate the number.
Efficiency is usually measured as Net Profit/Sales and expressed as a percentage. For example: if you make $100,000 Net profit on $500,000 worth of sales then your E is 20%.
Average Sale. This is an important measure because it looks at the average $ spend per sale. To determine what this is, look to your records eg. bookkeeping systems or cash registers. From a bookkeeping system, simply divide the Total Sales by the number of Invoices and cash sales. From your cash register, record the total sales $ for a period and count up the number of actual sales in the same period and divide. So how much are your customers currently spending each time they do business with you?
Transaction Frequency. Quite simply, how many times do your customers buy from you in a year? To work this out divide the number of invoices or sales calculated above by the number of active Customers. If you are in a high frequency business, this could be a number between 50 and 100 (once or twice a week) or a low frequency business eg. building this transaction figure could be 0.1 (once every 10 years).
Working out the NEAT Values for your Business
As mentioned above, multiplying your NEAT components together should give you a measure of your profit. If we break down the basic components we can see the components of sales and efficiency.
N x E x A x T = Profit
(N x A x T) x E% = Profit
Sales x Efficiency% = Profit
( Customers x Sales x Transactions) x Efficiency % = Profit ( 1 Transaction Customers )
Now, complete the calculation using the figures for your business: For example: if we have: 200 customers, sales of $1,000,000pa.; Net Profit Margin of 15% of sales; 5,000 invoices (transactions) per annum, then your NEAT calculation would look as follows:
N = 200 Active Customers
A = Average Sale
= Sales/Transactions = 1,000,000/5,000 = $200/ Sale
T = Transaction Frequency = Transactions/Customers
= 5,000/200 = 25 per Customer per annum
E % = Efficiency % = 15%
Check that: N x A x T = Total Sales (200 x $200 x 25 = $1,000,000)
Check that: Sales x E% = Profit ($1,000,000 x 15% = $150,000)
This is all very interesting but how do I use it?
Once you have your NEAT components, you can start to analyse your business. There are 6 easy steps:
Step #1: Start with N (Customers). How many active Customers do we have? What proportion of our total customer list are active? For example: if we have 1,000 Customers on file over the last 10 years, but only 200 are active then only 20% of our Customers are active. How can we rejuvenate the 80%? How can we attract more Customers? How do we stop the “churn” in Customers? How many of our active customers are “A Class” customers? How many are “C Class”? How will you find more A Class? Brainstorm your actions and look at the impact you could have on N. Write down the new N number.
Step #2: Improve Efficiency %. Efficiency % is calculated by profit over sales. The difference between sales and profit is composed of costs. What can we do to reduce our costs? How can we become more efficient? How can we reduce our Variable Costs? What can we do about overheads and finance costs? How does your business compare with other businesses in the same industry? Brainstorm your options and calculate the impact these will have on your efficiency %. Write this number down.
Step #3: Increase Average Sale. Look at your average sale. How does this compare with what you thought your average sale was? Most businesses over-estimate their average sale figure. How can we improve this figure? Look at adjusting your pricing? What would have to change about your goods and services for you to command a higher price? How can you package products and services to add value? How can you up-sell to better quality, higher margin goods? Can you cross-sell and introduce additional items with the sale (eg. “Do you want fries with your order?”)? Brainstorm your options and estimate your new average sale figure. Write this down.
Step #4: Increase your Transaction Frequency. How can you increase the number of times your customers will buy from you in a given period? How can you bring them back to your business on a more frequent basis? How can you keep in contact with your clients? Do you have a contact program? Why not – it is the most effective way to ensure that you are in contact with your customer base? Do you collect contact details? Do you have a loyalty program? Again, write down your options and estimate the impact on the number of transactions.
Step #5: Calculate your new NEAT. Simply multiply your new N x E x A x T to get an estimate of your potential new profit. How does it compare to your current profit levels? Is it worth an investment of time and resources to grow to this level?
Step #6: Prioritise and Action Plan. Given that most business have limited resources of capital and labour, you won’t be able to do everything on your NEAT lists. What are the 3 most important things that you need to do based on the NEAT Analysis? Select the 3 that will have the biggest impact and develop action plans to implement the solutions.
Do the NEAT Analysis This is simple to do. Even if you don’t have accurate figures use the NEAT concept as a basis for improving your figures.
Develop a Contact Program for your Customers and prospects as a matter of priority. This is an essential tool for any business and usually has a very quick payback period and develops long term relationships with your customers.
Contact your MindShop facilitator if you need to ask any questions or need some assistance in developing a NEAT view of your business.