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Identifying and leveraging key factors can help you keep your business going through a period of growth. Choosing the right key factors can also help you increase your bottom line. In this article, we will discuss what a key factor is, how to choose one, and provide examples of factors you can choose from when creating your business plan.
What is a key driver?
A key driver, also known as a business driver, is a factor that can affect a company's success or performance. Key drivers may vary by organization. Even your direct competitors can use other key drivers to improve their performance. Most companies use their own history or standard industry data to select their key drivers. These factors may include:
- Macro Factors: These are natural, fiscal, or geopolitical variables that affect a company on a regional or national level.
- Microfactors: These are variables that affect specific companies or industries on a local or individual scale.
How to choose key drivers
Use these steps to learn how to select key drivers for your business:
1. Use a checklist
Effective key factors meet four criteria. They are:
- Impact on performance
- measurable
- Compare with standard
- May change with additional information
When selecting key drivers, ask if your variable fits into all four categories. The more specific the factor, the more likely it is to meet all the criteria.
2. Look for profitable areas
Factors that directly affect sales performance, cash flow and costs can be important key drivers. The four elements that affect earnings include:
- Fixed costs or overheads
- Price
- Sales
- Different prices
To find these elements and your overall profit, consider looking at the items in your financial statements to see which areas could be key drivers.
3. Ask questions
When identifying key drivers, consider asking questions about what influences various aspects of your business. For each potential driver, ask a question like "What influences this factor?" If you provide an answer that meets the four key criteria, you can ask the same question again with the answer as the new factor. Continue this process until you arrive at an answer based on choice or uncontrollable circumstances.
For example, in a retail business, you might ask, “What affects my income?” Your answer may be the volume of the product. You can then ask, "What affects the volume of my product?" and the answer may be the number of sellers. The number of stores can affect the number of sellers. However, the number of stores your company operates can be a personal decision. This means you can choose "number of locations" rather than "revenue" as a more specific key factor.
4. Consider Benchmarks
Use industry-wide data to help you select key drivers. You can use information about past or current achievements of your company. You can also use data about the business models of peers and direct competitors. Consider searching an industry data pool or ask your accountant to help you access and compare this data.
5. Track all data
Once you have identified the key drivers, continue collecting and recording performance data for each one. This can help you make strategic decisions, improve future success, and select or change key factors as your company grows.
Examples of key business drivers
Here are examples of some of the key factors that can affect your business:
Expenses
The costs you pay to run your business can be a potential key factor. Costs can include things like buying production materials, paying employees, renting office space, or any other factors that require you to spend money instead of making money. Costs meet the following key criteria:
Impact on performance
The amount of costs you pay monthly, quarterly and yearly can have a direct impact on your bottom line and therefore your performance in a particular industry or market. Lower costs may allow you to be more competitive.
measurable
Costs are numeric financial data that you can track on a weekly or even daily basis. They are easily measurable and provide tangible statistics about the functionality of your business.
Compare with standard
You can compare your company's current expenses with your previous expenses and those of your competitors. You can also compare what you pay certain providers to what others charge. This type of information, average employee salaries and rental rates in your area can be accessed online.
May change with additional information
In most cases, you can change your costs after receiving more information. You may find that office space rental prices are dropping in your area, so you negotiate a change with your landlord. You may also find that another supplier is charging two dollars less per unit than your current supplier and decide to switch or negotiate a deal with your current partner.
Customer Satisfaction
Customer satisfaction is a less tangible key factor, but can still be an important factor for your business. It meets the following key driver criteria:
Impact on performance
Customer satisfaction is directly related to company performance. Happy customers may come back for additional services and may even be willing to pay a little more money for certain items if they develop brand loyalty.
measurable
You can measure customer satisfaction through channels such as feedback forms, surveys, questionnaires, and online reviews. More positive reviews can mean that customers are satisfied with the products and services your organization provides.
Compare with standard
You can compare your customer reviews with those of your competitors by viewing social media comments and online ratings and reviews. Sometimes customers can make their own comparison between two companies or products in these forums.
May change with additional information
You can try to improve customer satisfaction based on the data you receive. You can sell different products, change hours of operation, hire new employees, or provide upgrades to better meet customer needs.
Request levels
In companies that provide estimates or quotes, request levels may be an appropriate key factor. Requests meet the following key criteria:
Impact on performance
The number of inquiries received or quotes provided can predict potential sales growth. As more potential customers learn about your company or its services, you may have a larger pool from which to draw customers.
measurable
You can count the number of requests you receive or offers you make using a tally system or spreadsheet. You can keep records from month to month to predict future sales fluctuations.
Compare with standard
If you've been tracking this data for some time, you can compare your numbers from month to month. Some of your competitors may also share or publish data about how many inquiries they have received or the offers they have made to potential customers.
May change with additional information
If you find yourself lagging behind in customer acquisition during certain months or seasons, you can adopt marketing strategies to reverse this practice. You can attend supplier fairs or engage in social activities. You may also consider acquiring additional advertising space in local media.
Number of locations
For large companies, the number of offices can be a key factor. Especially in retail or service markets, the choice of location and number of locations to offer can have a direct impact on profit margins. The location meets the following key criteria:
Impact on performance
More locations can lead to more customers depending on the specific business and market. Selecting a new location in an area with urgent need and little competition can be a strategic move to grow your business.
measurable
You can measure the number of locations you have, the distance between all locations, and the distance and number of competitors' locations. This data can help you decide when and where to open a new storefront.
Compare with standard
Comparing your location to that of your competitors can be as easy as doing an internet search. Many companies list their location addresses on their websites or social media.
May change with additional information
You can add a new location if you find out that a competitor's store is closing or that a new market has a place to rent. You can also close a spot in a crowded market and allocate those resources elsewhere.
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