Opinions expressed by Entrepreneur contributors are their own.
The world of business is like a kaleidoscope – the picture’s never the same for very long. Keeping your company alive through all the changes usually requires transforming it. But how do you know when you need to do something different, and how do you actually make the pivot?
Signs its time for transformation
Generally, there are three big red flags that indicate it’s time for transformation.
1. Revenue dips
Revenue refers to all the money your sales channels bring in for you before you take out any expenses. A dip in revenue means that, for whatever reason, people aren’t buying as much in one or more of your business areas. This signals that people have shifted their preferences or have new needs you aren’t meeting.
2. Profit goes down
Profit is the money you have left once you subtract your expenses from your revenue. It’s the money that allows you to explore and scale, so it has a direct influence on future planning and your ability to compete. It can dip because revenue tanks, but profits can also go down because your costs go up. So, don’t assume that profits are down just because you blundered or missed something.
3. Revenue per client decreases
Revenue per client (RPC) is how much money you can expect a single customer to bring in for you. Lower RPC can mean you’re not communicating well enough about everything you offer, you don’t have much variety anymore, quality has gone down, or you’re not interacting in ways that support feelings of customer trust and loyalty.
None of the above issues are strictly interpersonal or operational. So to address them, look at the big picture and avoid treating anything as though it exists in a vacuum.
Related: 3 Tips to Build Trust and Drive Business Transformation
A real-life example
Years ago, I worked at a company that serviced devices like laptops, printers, desktops, servers, and TVs. At the time, it was pretty standard for people to pay a little more to get a two-, three-, or five-year warranty on those products. People would buy the warranties, and our company would fix up the devices.
Then, the price of these technologies started going down. People began to realize that it didn’t make a whole lot of sense to pay, for example, an extra $500 for a three-year warranty on a $1,000 item. It became more and more practical to buy a shorter warranty, and people eventually figured that, if something went wrong with the item, then they’d just buy a new one.
You can probably guess what happened next. We couldn’t do as much servicing, so all three points – revenue, profit, and RPC – fell. We knew that business wasn’t going to magically get better later with people wanting warranties again. The prices had already dropped enough that customers were willing to just buy new instead. We had to face the fact that, if we kept operating without a change, we’d either have to eat the money decline or close our doors. Since we recognized that doing the former wasn’t going to help us in any way, it was time for the company to transform.
Related: Transform Your Business by Encouraging Experimentation and Change
What to do once you know transformation is the right choice
If you see your three key metrics diving and know you have to shift, the next thing to do is take a hard look at your core competencies and resources. What skills can transfer over to another area, or what can you use a little differently?
At the computer company I worked for, we knew people didn’t want warranties on those specific items anymore. But we still had many people with tools and vans who could go out to homes or businesses and fix things. When we looked at the markets, we could see that getting into the medical arena made a lot of sense. Many medical items still have warranties because they can cost thousands of dollars, and clinics and hospitals will always want to make sure the devices are working well to keep patients safe. Plus, many of the items operated with computer technologies, which we had plenty of experience with.
Sometimes, you have all the resources internally to make the transformation happen, and that’s great. Other times, it’s good to bring in external consultants, industry experts, and strategy architects. Sometimes you even need to bring in new leaders – a VP of Product Development, a new CEO, or a new sales leader. Whoever you bring in, they should know your new area like the back of their hand.
Related: 5 Simple Steps to Digitally Transform Your Business
Make “evolve or die” your motto
Not every company recognizes the warning signs that it’s time for change and does something about it. Probably one of the most famous cases is Blockbuster, which rejected the future of streaming and said no to an offer to buy Netflix. Netflix is now a giant, while Blockbuster filed for bankruptcy and has a single store left. But by keeping an eye on revenue, profits, and RPC, you can spot signs of trouble early, transform yourself if needed, and avoid Blockbuster’s fate. Watch your numbers, and don’t be afraid to evolve.
This article is from Entrepreneur.com
