March 25, 2015

The Math Behind An Annual Objective

Look at this business. Over the next five years, the business is projected, via measurement of annual repurchase rates and new customer acquisition, to shrink from $34 million to $31 million.

In other words, this business is dying.

A logical person might ask how many new customers need to be acquired, in order to cause the business to grow by 10% in the next twelve months?

Using a simple five year forecast model (send me an email message if you'd like a copy of the prototype I use ... kevinh@minethatdata.com), we can plug in an assumption. Take a look at this table:



You need a 26% increase in new customers to get the business to grow by 10% in the next year.

This, then, becomes your objective.

In another run, I learned that the business needs a 10% increase in new customers in order to stem prior year demand losses.

I would write an objective that looks something like this:

Objective: Increase sales by at least 10% by increasing the number of first-time buyers by at least 10%.

  • Exceeds Expectations = More Than A 30% Increase In New Customers.
  • Meets Expectations = A 10% To 30% Increase In New Customers.
  • Missed Expectations = Less Than A 10% Increase In New Customers.
From a bonus standpoint, I'd pay 100% of the annual bonus level if the company exceeds expectations. I'd pay 50% of the annual bonus level if the company meets expectations. I'd pay 0% of the bonus level if the company misses expectations.

This allows every salaried employee to care about acquiring new customers. Suddenly, your email marketer is going to bring up ideas to grow the email list. Your creative staffer will want to know the style of creative that brings in new customers. Your merchants will want to know what new customers purchase. Your information technology team will care about improving the company database to identify the best selling items to new buyers.

Annual objectives, especially those that yield bonus payments, are a powerful way to align all employees around a common objective that is directly linked to business improvement.

A show of hands ... how many of you participate in a bonus plan of this nature?