The Growth Formula for your Business
Your Growth Formula
Every business should have a growth formula. As a professional manager, you should be able to clearly articulate the growth formula and so should all your employees. But that’s a training, communication, and possibly a management problem. We’ll get into all that later. For now, let's focus on the growth formula.
A growth formula is nothing but a set of equations that define your business. As an engineer by profession, my default way of thinking is in terms of equations. Business is no different. As you will see business is nothing but a set of equations, the variables of which can be manipulated to drive a business forward.
To start let’s understand what an equation is and then apply it to business.
In this very simple example, y is an output variable, and x1, x2, and x3 are input variables. The value of y is determined by the values of x1, x2, and x3. As you change the input variables, the output variable, y in this case, would change. To increase the value of y, we can increase the values of x1, x2, or x3, while holding all the others constant.
The Business Equation
Business is no different. Replace y with “Revenue” and x1, x2, and x3 with drivers of Revenue and you now have a business equation.
Here is an example:
In this simple example, we’ve created a simple equation for Revenue. To drive more revenue, we now have 2 input variables: Sales Price and Number of Units Sold. If we don’t change the number of units sold and increase the sales price, we increase revenue and vice versa. Better yet we can drive both up.
How do you do that? Using various strategies to increase the sales price and the number of units. For example: To increase sales price you could enter into a new market segment with your product, you could create more value for your existing customers and then charge them more, etc., etc. To increase the number of units, you could increase the number of customers who buy from you. You can increase the conversion rate of existing customers.
What we’re getting to now is the second concept: Equations of Equations a.k.a. The Business Growth Formula
Equations of Equations a.k.a. The business growth formula
Let’s expand on our basic revenue equation and create a couple of subequations.
The business growth formula is an equation of equations. Each input in the main equation can become a sub equation having its own inputs and its own output, each of which can be manipulated by its own strategies.
In the example, we’ve defined a revenue equation and two subequations.
The first concept to understand here is that of inputs and outputs. Outputs are parts of the equations that are driven by variables (i.e., inputs). The inputs can be manipulated to change the output. You have less control over the output directly. The identification of inputs and outputs is a critical piece of how one should think about equations of equations.
Mapping Your Growth Formula to Teams and Strategies Thereby Driving Accountability
The beauty of organizing this way is that now you can map this growth formula to appropriate strategies driven by various teams. You can now assign accountability to those teams. We have 3 inputs that we’re tracking, and we’ll assign them to various teams.
As you can see, we’ve now put the accountability for 3 inputs — Number of Units sold per customer, Number of New Customers, and Number of Active Customers to 3 teams — Growth Marketing, Sales, and Account Management respectively.
Now give each team a single-threaded leader (more on this later), and you’ve built accountability into a system that ties back to Revenue.
Expand this to other outputs that drive your P&L e.g., COGS, Operational Expenses and you’ve built a framework that can tie Financial Metrics (Outputs) to Inputs (Drivers and KPIs) to Teams (Accountability) to Strategies (Ways to move the Inputs).
Thinking of business as an equation that can be manipulated through different strategies, is the simplest way of running a business.
The growth formula is nothing but the various growth equations of your business that consists of inputs and outputs, the various teams who are accountable for driving the inputs up or down, and the associated single-threaded leaders who are running those teams.
Creating a Dashboard for tracking
The final piece of the puzzle is to now tie back everything that you learned into a dashboard for your business.
Now you’ll want to track progress against the different strategies that each team is driving and that’s where insights/dashboards come into play. Let’s use our example from before and put everything into a dashboard.
Here is a simple way in which a CEO can use this dashboard:
You can start analyzing your business starting with the top. Revenue is doing well, but the average price isn’t. The team accountable for Pricing goes back to their desks and gets the CEO an update on why pricing is not only lower than the previous year during the same time, but also versus the plan the team set out. On the other hand, the number of units sold is solid, much better than plan and better than the previous year. That growth is primarily been driven by new customers. The sales team is crushing it. However, there could be an underlying problem. Two other inputs seem to be in red. Although the number of units sold per customer is lower than the previous year, it was expected as the plan called for only 7.54. The big red flag is the number of Active customers. The number is certainly lower than the plan and needs some investigation. So, at the end of your weekly business review (WBR) (We’ll discuss this later), you’ll come out with two action items.
So that’s it my friends. You can see how by defining the simple growth equation for your business, we’ve now covered, outputs that you care about as a CEO. The variables/inputs that will drive those outputs, teams, and single-threaded leaders who are accountable for those inputs, the various strategies that teams can try out and maintain a backlog of to drive
1. What if I have different growth formulas?
Not if. You will have multiple growth formulas. Each of your businesses might have a different
While we are on this topic, let’s also define what a business is. In my opinion, a business has 3 components to it.
Who: The customer segment you are selling to
What: The product and/or service you are offering that segment
How: The distribution channel you’re using to sell to the customer segment
You change one of these variables and we’re in a different business. In that sense, you can think about your core business growth formula as an aggregation of multiple growth formulas, even if you just change one variable, which might be a distribution channel.
2. I’m confused. In my team, I’ve defined an equation that each of the input variables and assigned accountability to my team members. They in turn defined their own equations and assigned inputs to their team. Is this possible?
Absolutely possible. In a multi-level hierarchical organization, every single-threaded leader, accountable for an input, might define his or her own equation. The input to the top is output to the bottom, which the single-threaded leader is tracking.