There’s a lot of talk about how start-ups can teach corporations about how to do business, but says Michael McGee there are nine things Coca-Cola likely does better than your agency.
Okay, so this doesn’t tell the whole story. It did manage to pick up a lazy $106 million from increased Coke sales in New Zealand, Fiji, PNG and Indonesia and an additional $78 million from alcohol and coffee beverages sales between years, so don’t feel too sorry for them.
But do you think Coke is worried that its price per case dropped from $8.59 per case in 2014 to $8.48 per case in 2015?
Would it ignore this 11 cent price drop and not worry about it because ‘it’s only 11 cents’? Or, would it look at this as a real problem, one that cost the business approximately $35 million if it maintained last year’s prices?
When Coca-Cola discovers that there is a decreasing trend in its price per case what could it do to fix it? The good news for them is that the corporation has detailed data to assist with this process so it can narrow in on the cause. After all, diagnosing the problem is halfway towards fixing it!
- Is the purchasing power of the Woolworths & Coles duopoly driving prices down in an attempt to preserve their own profit margins?
- Is Coca-Cola running sales promotions at the wrong time?
- Is Coca-Cola losing market share to other soft drinks in the same category or is the consumer choosing a healthier refreshment instead?
- Does a colder than average month in spring result in lower than predicted sales which forces Coca-Cola to discount its price later to reduce stock?
There are hundreds of factors that could influence the price per case, and I’d be pretty certain that Coca-Cola monitors all these factors on a regular basis and could probably predict the price change before it happens.
I would also make an educated guess that it doesn’t just discover this when the board reviews the results at the end of the year. It measures everything it can to control and predict and make better business decisions. So what has all this got to do with your creative firm?
What can we learn from how large companies like Coca-Cola operate and manage their businesses and apply this to your much smaller creative business?
Coca-Cola measures everything it can to control, predict and make better business decisions and the reality is most creative businesses don’t.
Is this because Coca-Cola employs 15,000 people in Australasia and it needs this visibility to understand what’s going on in every corner of its operations, whereas most creative firms employ between 5 and 55 staff, so it’s easier for owners and managers to understand what’s working and what isn’t, without the need for a mountain of data to back it up?
Honestly, how many decisions do you make in your business on gut feeling alone?
I’m not suggesting for a minute that you should over-analyse your business and measure everything that moves, but most of the firms that I talk to could vastly improve.
The information I have shared with you about Coca-Cola is real information from its 2015 Annual Report. This is summary information for its shareholders and potential investors, enough information to evaluate how the company is performing.
The key point here is that this is just a summary of the information and data they have available to them. The price per case is a simple measure that Coca-Cola measures to indicate a whole lot more about how its business is performing.
So what’s the equivalent to ‘price per case’ in your business?
The average employee works approximately 1,800 hours per year, which means if you’re a firm with 10 staff, you have 18,000 hours available to think, strategise, design or write and convert that into value that your clients are willing to pay for.
Take your gross profit from last year and divide it by 18,000 (or whatever number you arrived at) and you will get a number similar to an hourly rate. This is effectively what you earned per hour over the past 12 months.
Could you track this number on a monthly and quarterly basis? Could you apply this to other areas of your business?
If your hourly rate is up or down on the previous year, do you have enough information to determine why?
If your revenue dropped by 10% from last year, could you easily drill down to pinpoint the reason why?
If your revenue increased by 10% from last year but you still ended up with less profit, would you have enough information to tell you why?
As I said earlier, diagnosing the problem is halfway towards fixing it.
Here are the top nine measures Coca-Cola would implement if it ran your firm:
If Coca-Cola was managing your business, this is what they would track on a monthly, quarterly and annual basis.
- Gross Profit (Billings less Direct Costs)
- Net Profit before Tax (Gross Profit less Overheads)
- Net Margin (Net Profit divided by Gross Profit)
- Salary/ Gross Profit Ratio (Salary divided by Gross Profit)
- Working Capital Days (working capital divided average daily overheads)
- Effective Hourly Rate by Total Firm
- Effective Hourly Rate by Client
- Effective Hourly Rate by Industry Sector
- Effective Hourly Rate by Department (client service, production, creative, etc.)
These nine measures will tell you a lot about what is going on in your business, particularly if you track them over time.
Why not start by calculating these measure for the last financial year and use that as a starting point to compare with your results over the next few months, quarters and years.
Michael McGee is the founder of M’Gee Consulting
(Note that calculation of some of these measures will only be possible if you have captured the right information in the first place)
*The revenue and number of cases sold in the opening two paragraphs refer to all beverages in the non-alcoholic beverages category and not just Coca-Cola.