measurement

I spend a lot of time thinking about the balance between cultivating customers and customer profitability – both for my own business, and for my clients. For every type of B-to-B business – whether you sell products or services – it is critical to understand if your clients are actually worth it. And for jewelry designers faced with the constant request to provide memo goods, it’s business life-or-death.

I have long taken issue with the statement the customer is always right. It was stupid when it first came out, and it’s still stupid today. I understand that someone was trying to make a point about how we are supposed to treat others with dignity and respect, but the real intention was distorted the moment those words were strung together in a sentence.

Small businesses, micro-businesses, and solo-preneurs tend to think that a new customer – any new customer – is the point. They get so excited about the prospect of cash and exposure that they fail to analyze the potential profitability of the source of that cash and exposure. I can personally attest to the fact that invoices paid do not necessarily equate to client profitability. I have learned walk away from accounts that seem like a big deal, because they steal focus, money, energy, creativity, or even brand reputation from my own organization. Even a big client can be not worth it. But this is a difficult business truth to accept for a small business that is trying desperately to cultivate sales.

Let's take a brief look at whether or not to take on memo accounts, and then I'll show you how to analyze any type of customer for potential profitability.

Should I Open Memo Accounts?

I am often asked by jewelry designers if they should take on memo accounts. And my answer is pretty consistent: Mostly no, with rare exceptions. The exceptions are easy to list: It’s reasonable to take on a memo account if it will deliver on four out of five of the following points:

1. Provide you with genuine credibility and brand exposure (i.e., “So-and-so carries my work,” which leads to other retailers saying WOW and buying in). The ideal memo account should be a door-opener.
2. Is an account that is known to do a terrific job of promoting and selling designer work – even if it’s on memo.
3. Is an account that is known to pay its bills promptly.
4. If you can afford to stock that account with the amount of inventory they need without going into debt in the process.
5. If you can afford to service that account without it creating costs (in you and your staff’s time and attention) that take you away from other more profitable opportunities.

There. That’s the checklist to use when considering whether or not to take on memo accounts. If a potential memo account can’t be a hit on 4 out of 5 of the points above (pick any 4, but no less than 4), then it probably isn’t worth your investment.

Why do I say this? Because everything you do as a small business (or micro-business, or solo-preneur) must turn a profit. When you self-fund a business, the only money you have to fund growth is the money you put back into the business. You can’t afford to spend the time, attention, or investment-in-inventory on accounts that aren’t putting profit back into the business – and by that I mean profit sufficient to help you continue your self-funding.

I can already hear some of you thinking, “But I can’t get into any accounts without memo!” And I know that’s true. Jewelry retailers are notoriously hard to get into – the majority of them want jewelry designers to pay to play. If this ultimately turned into a profit-generator for most jewelry designers, I wouldn’t be writing this blog. But it doesn’t. So we’re going to spend a few minutes talking about how to analyze the profitability of a client.

Now Let’s Analyze Your Client Profitability

When you take on a new account, it’s imperative that you calculate the costs, time (which is, of course, a cost), investment (inventory, up-front development work, shipping, etc.), financial return, and amount of time it will take to achieve that financial return. This is easier than you might think.

I’m going to explain all of this below.

Start by Understanding Your Fixed Costs

To complete this section, start by inputting your PROJECTED  REVENUE in the “Anticipated Revenue” tab of the workbook. Then go to the “Fixed Costs” tab in the workbook.

For every project you do, you have Fixed Costs. The most obvious Fixed Costs to a product seller are the cost of the inventory the client wants you to sell them – or “loan” them if it’s memo they’re asking for. If you are required by the client to pay shipping, those costs will be fixed as well. Fixed Costs would also include any unreimbursed travel you are required to make to get the client set up or to provide training, and would also include any displays, packaging, or marketing materials that you will provide.

For service providers, Fixed Costs can include the cost of the bidding process, the cost of setting up communications tools, training for both the service provider team and for the client, travel, and support materials. All the time, fees, and expenses incurred in the winning of a client and in launching them –whether it’s to sell your goods or use your services – are Fixed Costs.

Formula: Cost of your time + cost of employee and contractor time + cost of inventory (one year) + cost of unreimbursed travel + cost of unreimbursed shipping + cost of marketing, training, and marketing materials + any other required initial expenses = Fixed Costs.

Analyze Variable Costs

To complete this section, go to the “Variable Costs” tab in the workbook.

Variable Costs are the costs of managing a customer after start-up. For your analysis, you need to figure out the Variable Costs of the new client in the course of the first year.

The first variable cost you should calculate is the amount of non-production time you and your employees will likely spend managing the client. This includes time spent managing orders, special orders and special requests, in meetings, dealing with revisions and redirections, swapping out inventory, reconciling memos, invoicing, and the amount of time you spend calling them to collect overdue invoices. You should start by analyzing what the average client costs you in time to do these things, then use any market or peer information you have to determine if the client is likely to be lower-maintenance or higher-maintenance than an average client.

If the client requires you to participate in promotions throughout the year, such as trunk shows, annual client catalogs or calendars, the expenses and time associated with these projects are also Variable Costs. Coop advertising should also be included, and you should calculate the amount of coop based on the amount of Projected Revenue.

Some computer software will result in added Variable Costs, such as a CRM that charges you by the client, or an image management system or project management software that you pay additional fees for adding new users or clients. Make sure you figure the incremental cost of all your business management tools, because those costs can add up fast, and you want to make sure you understand the costs relative to your clients. Otherwise, you risk overestimating how much each client is worth.

Formula: Cost of your time to manage this customer over first year + cost of your employee time to manage customer over first year + incremental costs to any business software tools + unreimbursed service costs + coop advertising costs + any other Variable Costs not listed here = total Variable Costs to manage client.

Figure Out the Break-Even Point

To complete this section, go to the “Break-Even Point” tab in the workbook.

Your Break-Even Point is the point at which the client has paid for itself. It is not the same as profit. Profit is what comes after the Break-Even Point. To calculate the Break-Even Point, you add up the total Fixed Costs of start-up, the total inventory costs for the first year, and the total Variable Costs per year. That is the cost you must recover in order to start turning a profit.

What if it’s negative? Then increase your Projected Revenue amount – in increments – to see at what level of sales that client would have to perform in order to be profitable. If the amount of sales required is unreasonable for that client, they’re not a good risk – with one exception: If you can demonstrate that they will produce significant profits in year two and beyond, and if your business can handle the strain of investing in that client for a full year before getting a return, the client may make sense. However, if you go into any level of debt in order to finance the customer, make sure you include the costs of that debt (credit card or loan fees and interest) in your Variable Costs for the customer for however many years you carry the debt.

Formula: Projected Revenue – non-inventory Fixed Costs – inventory costs – Variable Costs = Break-Even Point.

Determine the Contribution Martin

To complete this section, go to the “Contribution Margin” tab in the workbook.

While most small business owners are reasonably good at calculating costs of inventory and whether or not the sales of products are creating a profit, relatively few small business owners know whether or not a client is profitable. That’s because they don’t calculate the Contribution Margin.

It’s tempting, when you think about taking on a new client, to get excited about every sale. Emotionally, sales are fun. But rationally, we know we incur many additional costs in our effort to close the sale. Contribution Margin is how much money you have to cover your Fixed Costs once the Variable Costs have been taken into account. To get this amount, you subtract your total Variable Costs from the expected revenue for the client. By analyzing the Contribution Margin of each client, you gain insight into whether or not the client is producing a profit beyond the profit margin of the goods or services you sell them. This is essential insight, because a high-maintenance client may produce acceptable – or even very good – sales, but still be a money-loser.

Formulas:
Contribution Margin:   Projected Revenue – total Variable Costs = Contribution Margin.
Profit:   Contribution Margin – First Year Inventory costs – First Year Non-Inventory Fixed Costs = Profit.

Ongoing Profit Analysis

Use the “Contribution Margin” tab in the workbook. The section is “Subsequent Year Contribution Margin.”

Finally, you must ensure that each customer is returning a reasonable amount of profit after the first year. Many businesses will perform strongly for a few years, then drop off in subsequent years. This is particularly true when selling to retail establishments that have a style or fashion component, but it’s also true for service businesses that work with clients who eventually will develop some of those services in-house. Once client revenue drops below a certain level, they will stop being a productive client for you. When that happens, your time will be better spent elsewhere.

Formula: Projected Revenue – Total Variable Costs = Contribution Margin. Contribution Margin – Projected Inventory Cost = Profit.

While you may love what you do, you’re not in business purely for fun. You need to turn a profit, and if you’re not turning a profit, then either A) you’re in such a financial position that you can afford to do your hobby full time, or B) you’re going to eventually burn out (both personally and as a business). Invest the hour or two that it may take you to completely understand this concept. Use the spreadsheet I provided to see how easy it is to calculate these numbers. And learn to identify which clients are worth serving and which are not.

Don’t be afraid to face the truth about client profitability

If you have a preponderance of clients who aren’t worth it, you need to know that. That knowledge will give you the impetus you need to find other ways of selling and other types of clients to sell to. A  business only dies when its owner stops feeling the motivation to find new ways of selling and new clients to serve. The time is going to go by either way. Wouldn’t you prefer to be earning a comfortable living at the other end of that passage of time?

So you've done the work of coming up with a business strategy, a minimum viable product or service, and a business plan. Now what? Well, for a company to achieve its strategy and operate effectively, it must have goals, measurable objectives, and a method of monitoring and managing results; in other words, a Management Framework. 

What is a Management Framework?

Management Frameworks are the tools used by the most competitive companies to turbo-charge innovation, harness energy, and align people, teams, and divisions. Without a management framework, companies function at a tactical level at best. Think of them as systems that facilitate setting and managing measurable goals and objectives that are linked to an organization's strategy. The best frameworks make it possible for a large group of people to see the strategic vision of a company in a similar way, orient themselves and their work to achieve the strategic vision, remain in alignment with one another even when working independently, and consistently improve their performance and renew their focus relative to strategy.

There is no perfect management framework, but there are several excellent ones. It’s important to understand how each system works, and which framework to apply to specific companies, cultures, or situations. Some of these systems also work well in tandem, offsetting each other’s weaknesses with complementary strengths.

The two most frequently used systems for performance measurement are SMART goals and KPIs. Unfortunately, these are also the two weakest measurement approaches, best used as the tactical component of a more holistic strategic framework.

The two most used management frameworks are Balanced Scorecard (BSC) and Objectives & Key Results (OKR). Two other frameworks, 4DX and EFQM, also merit consideration when determining which management framework to adopt.

Let’s start with a comparison table, then look at the basics of each metric system and management framework.

Now let's do a high-level overview of each system.

KPI - A Measurement Approach

The most well-known metrics strategy, KPI is also the narrowest. KPI stands for Key Performance Indicator, which can be any performance metric for any business outcome or activity. A KPI can be a Lag indicator (an outcome measure — an indicator of past performance that measures the result), a Lead indicator (a performance driver — something you monitor or measure to determine if you are making progress toward a goal), or a Tactical measure (a short range, operational, or immediate metric, like a machine temperature or daily staffing level). It can measure success, output, quantity, quality, or time.

KPIs are most effective when used within a management framework, such as Balanced Scorecard, OKR, EFQM, or 4DX. On their own, KPIs can be useful, but they can also be suboptimizing and create conflicting focus between teams and departments.

SMART Goals - A Goal-Setting Method

Like KPIs, SMART Goals are a measurement type, not a management framework. Smart Goals are a popular goal-setting technique that focus on creating effective goals. There are no mechanisms within SMART Goals to drive alignment within an organization, and no guarantee that any particular goal will lead to innovation. SMART goals are a criteria, not a framework or system.

SMART Goals can be Lag or Lead indicators, and can be created at any level of an organization.

According to SMART criteria, there are five things that a goal must be:

• Specific
• Measurable
• Achievable
• Relevant
• Time-bound

4DX - A Prioritization and Measurement Method

Created by Stephen Covey and Chris McChesney, this is system is a hybrid; part measurement method, part management framework. It is designed to create:

• Focus
• Leverage
• Engagement
• Accountability

This system proposes to help managers and employees cut through the constant flurry of tasks and shifting priorities, and focus on the key goals for each area. Key concepts of this system include:

• The more goals a person has to achieve, the less likely they are to focus enough to achieve any of them effectively.
• Competing priorities and goals suboptimize the organization.
• Everyone should be working on two big goals (called WIGs, or Wildly Important Goals in 4DX) at any time.

Rules of this system include:

• No team can focus on more than two WIGs at the same time.
• The battles you choose must win the war (strategic alignment).
• Senior leaders can veto, but not dictate, goals (bottom-up goal development).
• All WIGs must have date gates, in the form of “X to Y by Date” to provide clear scope.

OKR - An Agile Management Framework

Now let's start looking at true management frameworks. The first is OKR, which stands for Objective & Key Results. The OKR and Balanced Scorecard systems share a lot of DNA, and the choice between them often comes down to pace and agility. These two systems can also be used together to gain the greatest benefits of both systems.

Objectives in OKR

According to the OKR definition, an OKR consists of 1–5 Objectives which, by their nature, are qualitative concepts (characterized by their quality and difficult to measure). They provide direction, typically posed in question form:

• What do I want to accomplish?
• Where do I want to go?

The purpose of objectives is to provide the definition for the goal(s) you want to pursue. These are most often Lag, or Outcome measures.

The characteristics of OKRs should be:

• Directed
• Aligned
• High in impact power
• Easy to understand
• A means of inspiration

Key Results in OKR

Each of the 1–5 Objectives should have from 3 to 5 Key Results (these need to be quantitative concepts and must be measurable). If it’s not measurable, it’s not a key result.

The purpose of Key Results is to define the measurements that will determine if the organization (team, individual) is progressing toward the objective. Key results are milestones, and answer the questions:

• How will we know when we get there?
• How will we accomplish that?

Key Results can  be a combination of Lag (Outcome) and Lead (Performance Driver) metrics, and should be:

• Easily measurable
• Specific
• Bound to a specific time frame

Initiatives in OKR

Each of the 3 to 5 Key Results may also be linked to specific initiatives meant to define the work needed to maintain progress on the Key Results. They are specific actions and activities. There is a minimum of 1 Initiative related to a specific OKR.

Initiatives answer the question:

• What must we do in order to get there?

Initiatives are almost always Lead (Performance Driver) measurements, and should be:

• Easily measurable
• Specific
• Controllable
• Bound to a specific time frame

Want to learn more? Buy the definitive guide on OKR and support an independent bookseller! Order "Measure What Matters" here.

Balanced Scorecard - A Holistic Management Framework

The Balanced Scorecard is a management framework developed by Robert Kaplan and David Norton. It is a strategic method designed to align all areas of an organization with corporate strategy, and to drive awareness of what a business must do for customers, excel at internally, and invest and develop in order to achieve its strategic goals.

It is the strongest framework for eliminating competing goals, mitigating suboptimization between departments or functions, and ensuring holistic business goal-setting. It is also one of the best frameworks for driving innovation, due to the unique framework of the Four Perspectives.

Four Perspectives Framework

The framework of the Balanced Scorecard is built on four perspectives:

• Financial Perspective: What must we do for our stakeholders in order to be successful? These are Lag measures.
• Customer Perspective: What must we do for our customers, in order to achieve our financial goals? These are generally Lag measures, but can include Lead measures as well.
• Internal Perspective: What must we excel at, internally, in order to achieve our customer goals? These are typically Lead measures.
• Learning & Development Perspective: What must we learn, invest in, develop, or acquire in order to achieve our Internal goals? These are typically Lead measures.

Balanced Scorecard implementations are often complex, but it can be implemented in a very lean manner. If complexity is the one reason you’re concerned about using a Balanced Scorecard in your business, dig a little deeper. Small businesses can implement Balanced Scorecards successfully using a lean approach (I call it a “Skinny Scorecard”). One of the best ways to reduce the complexity of the Balanced Scorecard is to combine it with an OKR approach, which keeps the richness of the Balanced Scorecard perspectives while benefitting from the agility of the OKR method.

Learn all about the Balanced Scorecard and support an independent bookseller! Order The Balanced Scorecard here.

EFQM - The Broadest Management Framework

Of all the management frameworks, EFQM (European Foundation for Quality Management) is the broadest. EFQM was founded by a consortium of European business leaders with a goal of creating a formalized management framework to help organizations become more effective, which in turn would drive overall effectiveness of the European economy. As a result, this framework reaches beyond individual organization boundaries and has a strong social component. The idea is that using the EFQM Excellence Model helps organizations understand where they are on a “path to excellence,” while giving them tools and techniques to measure improvement over time.

In the EFQM model there are “enablers” and “results.” It is sometimes thought that Enablers are similar to Lead measures, and Results are similar to Lag measures, but the model is a bit more nuanced than that.

Here is how the model is most often illustrated:

EFQM Concepts

Enablers include:

• Leadership
• People
• Strategy
• Partnerships and Resources
• Processes, Products, and Services

The idea is that by changing what any of these enablers do, you can change the results of the organization.

Results are the goal, with specific principles in mind:

• People Results
  • Principle: Leading to inspiration and integrity.
  • Principle: Succeeding through the talent of people.
• Customer Results
  • Principle: Adding value for customers.
• Society Results
  • Principle: Creating a sustainable future.
• Business Results
  • Principle: Developing organizational capability.
  • Principle: Harnessing creativity and innovation.
  • Principle: Managing with agility.
• Overarching principle: Sustaining outstanding results.

Managing Results

EFQM’s RADAR function is similar to Balanced Scorecard and OKR in so far as it requires the planning and development of “approaches” to describe how each “result” will be achieved. Once you know what the approach will be for each goal, there is a “deployment” step that determines how, where, and when each approach will be implemented. The “Assess and Refine” element of RADAR ensures that progress is continuously monitored, learnings are captured, and the group comes to consensus on whether or not the “approach” to the “result” is working. If it is not, it is refined.

Summary

Like shoes and swimming suits, there's no such thing as a Management Framework that fits everyone perfectly. It's valuable to select the framework that fits your organizational culture, business proposition, and strategy. However, if you're choosing between spending a year to get to the right framework, or spending the year with a management framework that's not perfect, I'd definitely choose the latter. Your management framework is one of the building blocks of business success. No business is too small to have one, and no small business can become a larger, more profitable business without one.

The fourth quarter is nearly here, and your head is probably in go-go-go-for-the-holidays mode. That's good - you're supposed to make hay while the sun shines, right? But the risk is that you'll wake up one day soon, the holidays behind you, and immediately become stressed over everything you’ve failed to do for your business while you were focused on production and sales.

Don’t go there! Life is a series of recommitments, and those times of recommitment are critical to our continued growth. September is an excellent time to review your business progress and recommit to your strategic goals. Pull out your calendar right now and look for one day in the month of September to focus entirely on business planning, goals for next year, and projects you're ready to take on. Making time to plan is one of the most important things you can do as a business owner.

It’s Scheduled . . . Now What?

To begin, decide if your planning day will be a day for just you or if you want key members of your team or important advisors to join you.  In most cases it is useful to include others for at least part of your planning. It’s easy to get stuck in our own assumptions or perspectives. Inviting others to participate can present new ideas and challenge old ones.

Assemble key information about your previous year. At a minimum you need:

• Sales Revenue by Month
• Cost of Goods by Month
• A report showing customer performance, including how much business each customer did with you the past year, which customers you lost (did not purchase in the past 12 months) and which customers you gained.
• Detailed expense report
• Summary expense report showing total expenses for labor (salaries and benefits), sales and marketing (including non-employee commissions, trade shows, photography, promotions, advertising, etc.) and facilities (rent, security, etc.).
• If you had goals for 2013, list all goals and your accomplishments for each.

Prior to your planning day, decide where you will work. If you can’t work in your office without constant distractions, plan to work somewhere else. Your planning is too important to sacrifice it to perforated attention.

The Planning Day

Spend your first two hours examining the reports you assembled. Ask, and answer, the following questions:

1. How has my revenue been in 2016 compared to 2015?
2. What have I done differently (if anything) to change my revenue in 2016 (positively or negatively)?
3. Did my Cost of Goods go up, stay the same, or go down? Why?
4. Did I gain more customers than I lost?
5. Why did I lose the customers I lost? Were the losses intentional or unintentional?
6. Am I spending my money on the right things?
7. Did I spend enough money on marketing and promotion (including Trade Shows) to generate the amount of business I planned to do?

Now set your financial goals for 2017. These goals include:

• Revenue goals for 2017
• Cost of Goods goals for 2017
• Net profit goals for 2017

Spend your next hour or two contemplating your customers. Your customer mix determines your success, so it is essential that you consider whether or not you are serving the right customers. How do you know if you have the right customers? The right customers want more of what you are comfortable giving. The wrong customers constantly ask for things that feel off-track to you. For example, if you are Neiman Marcus, customers that hound you for lower prices aren’t a good fit. But if you are Wal-Mart, you expect (and feel comfortable with) customers demanding lower prices. All customers want more of something from you; the question is, are the things they want the things that are right for your business?

Create a visual model that will help you cultivate more of the right customers and less of the wrong ones in the year to come. Draw a vertical line down the center of a piece of paper. On the left side, write the names of your very best customers. On the right side, write the names of troublesome customers who are expensive to serve or just aren’t a good fit. Once you have listed the customer names, draw a horizontal line under them. In the space below, write the common attributes of your “good” customers and your “bad” customers. Look for patterns and similarities within the two groups. Now create your Customer goals for 2017. These goals include:

• Total number of customers (existing and new) by end of year in 2017
• Total number of new customers in 2014, and the specific attributes you will seek in those customers
• A specific list of the customers that you want to (gently) let go in 2017

Once you know the types of customers you want to add in the coming year, consider where to look for them. What media (magazines, internet, social media, events, etc.) do your “good” customers respond to best? Chances are, the customers you seek pay attention to those channels as well. Create a list of all the marketing promotions, advertising, and events you did in 2016. Circle the ones that did not perform as you expected. For each marketing activity you circled, consider why it wasn’t successful. Was it the wrong venue with the wrong type of customers? Did you fail to prepare properly for it? Did you learn something from it that will make you more successful if you try it again?

Do a similar activity with your successful marketing promotions. Why were they successful, and what can you do to increase the success in the following year and find more opportunities like them? Once you have analyzed your past marketing efforts, it is time to review your sales and marketing goals for 2017. I say review, because you have likely already committed to some trade shows and advertisements already. Your review and goals should include:

• Total dollars you intend to spend on marketing in 2017. Revise if, after analyzing your customer and marketing plans, you think the number should be changed.
• A list of the marketing activities you plan to participate in. Be prepared to cut plans you have made for marketing activities that you no longer believe will be successful, or to add marketing activities you hadn’t previously considered.

After setting your customer goals, it’s time to move on to operations. Review the goals you have already set and the thought processes that got you there. Then answer this question: What operations must I excel at in 2014 in order to achieve my marketing, sales, customer, and financial goals? Your final goals will include a list of each operational improvement you must invest in in 2017.

If you take the time to plan for 2017 in this way, you will start your year focused and recommitted to business success. You will also reclaim the excitement and energy that come with feeling prepared.

* Update 2022: This article was written in 2014, and while the information in the following post is still completely valid, one significant thing has changed. The emergence of frictionless, in-app purchasing on Facebook, Instagram, Youtube, Pinterest and TikTok has made social media channels an extension of website offerings in a much more seamless way. The sale of under $500 items is much more likely to be successful because of the higher likelihood of the purchaser being willing to make an instant purchasing decision (and therefore, the lower the price the higher the close rate). But even luxury goods are experiencing higher sales on social channels than ever before. It's still a numbers game. It's definitely expensive to compete, because paid advertising for social catalogs is almost a requirement at this point. But to say selling on social channels is unlikely, as was true in 2014, is no longer true today.

Social Media Sales are Secondary. Prospecting and Awareness Building are Primary

Sure, in the beginning there was tremendous excitement about how social media would level the playing field for small businesses. It was free, and it was the answer to small business sales.

Only it wasn't. And it isn't.

So when I see quotes that speak to analyzing the success of your social media efforts based on the number of sales, I cringe.  Because the implication that social selling is somehow less expensive or easier than traditional media, is simply incorrect.

Social Media Should be Analyzed like Display Advertising

What is exciting about social media is that if you throw a lot of elbow grease at it, you can create a very large social media following. On Twitter, this means at least 10,000 followers and on Facebook this means at least 5,000 followers. Those aren't goals - those are minimum standards necessary to compete.

Before social media, only large companies could afford to run display advertising in consumer magazines and commercials on television with sufficient coverage to create genuine consumer awareness. But no company ever claimed that it knew how many sales were driven directly by its Super Bowl commercial. Why? Because advertising isn't measured in that manner (see this article in AdAge about the way Super Bowl ads are measured and thought about).

Then Why Advertise?

It is fairly common for companies to complain that they can never tell if their advertising is working. As a result, many small business owners refuse to advertise. This is unfortunate, because the failure to advertise equates to a failure to go fishing for new customers - which is called prospecting.  One way or the other, all businesses must look for new customers.

We do know that companies and products with higher visibility and industry/consumer awareness have higher sales. This is one of the longest studied and benchmarked aspects of the advertising/marketing industries over many decades. Social media appears to have a similar effect as display advertising in magazines and on TV - it makes a brand or a product more familiar, so people are more likely to buy when an offer occurs. But just as when an advertiser runs an ad on TV the phones don't automatically start ringing, when you add a buy link on Facebook the clicks don't necessarily happen either. So what do we measure?

• We monitor relative increase in consumer awareness to the relative increases in sales.
• We measure the number of new prospects per week.
• We measure the effectiveness of sales efforts to those prospects by measuring:
  • Percentage of quality prospects
  • Average number of contacts required to convert prospects to customers
  • Time lapse between acquiring prospects and converting them

If your prospecting efforts improve when using Social Media, then Social Media is working for you. These are just the metrics for monitoring prospecting success on Social Media. There are many other metrics for analyzing Social Media success, but that's a different article.

*Update 2022: We can measure the direct purchasing behaviors of social sales, from demographics to transaction details.

Creating Emotional Connection

Social Media has a secondary benefit which has a cousin in the display advertising world. First, think about how feel-good commercials make you feel about a brand. When Coca-Cola sings about inclusiveness, when the Ford spokesman acts like your next-door neighbor, when Flo at Progressive Insurance makes us laugh, we develop warm feelings for the brand.  This is a very specific advertising method designed to improve consumer brand engagement through an emotional connection.

Social media has an even more tangible engagement effect, because you can improve brand engagement with an emotional connection built on actual, authentic engagement. It requires commitment, but it works.

It's About the Sales Cycle, not the Sale

Remember how the Sales Cycle works?

1. Prospecting: Get prospects' attention, capture leads, establish your credibility as a brand.
2. Cultivating: Bond with your prospects, sort the more interested and likely from the less interested and likely, and create desire for your products.
3. Servicing: Close the sale, service customers, and deepen customer relationships
4. Rinse, Repeat (you will likely lose 14% of your customers each year, so this process never ends).

Just as it can take many weeks or even months for a display advertising campaign to pay off in actual awareness, so does it take many months and even years for a Social Media strategy to pay off in actual awareness. Luckily for small business owners, the economics of organic (unpaid) social media are easier on the budget.

So remember: You don't have to do every social media channel or paid social ads. But you must market and promote and seek new prospects on a constant basis, and the economics of prospecting on Social Media are fairly advantageous for small business. If you do decide to use paid social media as part of your advertising and marketing strategy, don't think you can measure its effectiveness solely based on direct sales. That will lead to disappointment and discontinuation of a medium that - if you're using it correctly - is providing important - and measurable - benefits for the entire sales cycle.

I was working with a client yesterday and she expressed a fear that is common to many people these days. This woman is extremely intelligent, highly successful, and well disciplined, yet she has the fear of being professionally and technically left behind.

It’s a reasonable fear. The world is changing quickly, driven largely by the pace of technology innovation. Twenty years ago everyone was aware that computers were changing the face of business, but the general perception was that computers were the domain of ‘computer people.’ 15 years ago business sociologists were telling us that the big chasm between Baby Boomers and Generation Y would be a difference in work ethic. Today it is apparent that Boomers are alienated by technology that their Gen Y counterparts take for granted.

Emerging manufacturing technology highlights the insufficiency of tool and die skills without computer aided design skills. Marketers who can’t navigate high end software and challenging database environments fall behind. Warehouse workers interact at a high level with automation tools such as mini-computers strapped to their wrists. Artists and craftspeople must master the demands of having their own websites – or at least be capable of providing direction to a website developer and manager. And the business executive who can’t independently navigate the myriad of internet and wireless protocols can get shut out of their business for days on end (or drive some poor IT support person crazy at all hours).

The challenges go beyond computerized workstations. Defined benefits and company-provided pension plans have given way to individual structuring of retirement strategies – leading to a requirement that all individuals understand markets and economics and investment strategies – which themselves  become more complex every year. Competition is constantly changing as the barriers to entry for new business continue to shrink. Even our communication is evolving rapidly as language becomes more technical.

Some people have opted out of the whole problem by declining to develop computer or technical skills. I don’t consider this an option. Anyone reading this blog would agree that the inability to read or write is a guarantee of economic deprivation. I believe computer illiteracy will contribute to a similar result in the near future (and to a certain extent, already is). If you moved to a non-English speaking country, you could not expect to gain successful employment or integrate into society without speaking the language. In the case of computers and technology, the other language has moved here, and everyone must be proficient. When a normally intelligent person “can’t” learn a new skill, resistance – not aptitude – is generally the culprit. Ending residual computer resistance will open the door to new competencies quickly for most people.

But what about my client, the very smart executive who is worried about keeping up? In her case, we discussed what she is afraid of keeping up with or in. She has broad business responsibilities, but they are not all-encompassing. So we made a list of the general areas of knowledge in which she can’t afford to fall behind, and then we identified a few key resources to help her stay on top of her game. After evaluating the field of possibilities, she decided she will need to incorporate two new monthly magazines, one weekly magazine, and 4-6 training classes (online or live) each year to sufficiently supplement her knowledge. In addition, she will enhance her project and decision-making work by including more research, particularly research of a peer-reviewed or academic nature. I could almost see her cortisol levels drop as she realized she could design a strategy for staying ahead of her game.

For anyone who plans to work past the age of 60, making a plan for staying au courant in the important developments of their chosen profession is a wise move. The knowledge that sort of stumbles onto us is a gift from the universe. But the knowledge we planfully acquire is an important gift we give ourselves.

(c) 2007, Andrea M. Hill