Understanding The Productive Unit

One aspect of business management that I often find problematic is the overemphasis on sales as the primary metric of activity and tracking.

Understanding that sales or the “Revenue” line on an income statement is a composite metric—combing aspects controlled by diverse segments of your organization—is crucial. Revenue is both, an operational concern and a Sales concern.

Because of this, Revenue figures alone can be misleading, masking underlying issues or disguising genuine progress.

Unveiling the Productive Unit

In my approach to evaluating a business, identifying the productive unit is always my initial step. The productive unit is the fundamental element of your operation—the core of your business's output. Depending on the nature of your business, this could vary significantly: it could be

• hours billed

• patients treated

• yards of fabric produced

• pounds of metal forged

• legal cases handled

Understanding this helps break down your revenue into a more informative formula:

This perspective is invaluable for truly grasping your business's mechanics.

The Misleading Nature of Sales Metrics

Relying solely on sales for business evaluation can be deceptive. A month with high sales figures could result from:

• Major repricing efforts coupled with a decrease in units sold.

• An increase in units sold but at lower prices.

These scenarios suggest different strategies and concerns, which remain hidden beneath the surface of gross revenue data.

Dissecting Productive Unit Analysis

Operational Productivity

The productive unit is owned by Operations. Operations is attempting to deliver as many quality productive units, per unit of time. The more you deliver, the more you can bill, the more higher your Revenue will be.

In order to understand and grow it, you’ll need to measure it in terms of:

1. The activities contributing to the creation of the unit

2. The resources facilitating these activities

Efficiency and productivity measurements here are vital in relation to activities and resources.

Operations goal is to increase “throughput”, or the productive units flowing through the company and out to be delivered to the customer or client using the resources.

Here is a page from our metric playbook on understanding where you are at with your resources and activities.

Pricing Dynamics

Separately handled, and ideally owned by the sales machine, is how we price that productive unit - or said better, what price we can fetch for it.

The pricing of your productive unit is influenced by factors such as

• market conditions

• your business's reputation

• your sales team's effectiveness.

Market forces set the upper and lower bounds of pricing, but within these limits, you can enhance value through:

• Enhancing perceived value and reputation.

• Improving quality relative to competitors.

• Increasing delivery speed.

• Reducing customer involvement and friction.

Pathways to Revenue Enhancement

With the right framework, boosting sales involves manipulating three levers:

1. Amplifying demand for your offerings.

2. Enhancing your delivery capacity.

3. Elevating your unit price.

Optimizing these aspects separately and consistently will lead to significant sales growth. Points 2 and 3 raise your monthly revenue, while point 1 makes sure you don’t run out of work as you increase throughput.

Action Steps for Growth

To leverage this framework effectively:

1. Identify your business's productive units (there may be more than one).

2. Implement tracking systems for these units.

3. Develop metrics around your delivery capabilities and resource allocation.

4. Determine your current average price per unit.

5. Monitor and evaluate this price regularly.

6. Construct and refine systems aimed at increasing:

   1. Customer demand.

   2. Operational throughput.

   3. Price per unit.

By focusing on these tailored metrics and strategies rather than just the sales figures, you can gain a more nuanced understanding of your business's health and drive more meaningful growth.