Three goal-setting methods to grow your business and reach its potential

Editor’s note: This article was first published in January 2014. Ira Kalb’s positions, as president of Kalb & Associates and marketing professor at USC’s business school, are as of 2014.

Ira Kalb is president of Kalb & Associates and a marketing professor at the University of Southern California’s business school. For any business that is just starting out, or any company looking to grow and reach its full potential, Kalb has outlined three methods that have proved very valuable over more than 40 years of analysis.

This time the article is necessarily long, because it is an essential guide for any business owner who is thinking about growing their company. The first step is to put the emphasis on measurable goals, which is where strategies should be focused.

Why are goals so important?

Lao Tzu, the ancient Chinese philosopher, once wrote: “A journey of a thousand miles begins with a single step.” Without a goal, a company may take steps in the wrong direction. When that happens, we are likely to end up very far from the goal we wanted to reach in the business. So, before we go any further, it helps to list some of the important benefits of having a goal:

1. Focus. It provides a common target at which all resources (human and financial) can be aimed.
2. Coordination. It enables the company’s staff to coordinate their efforts to reach the destination.
3. Measurement. It allows everyone in the company (1) to keep track of where they stand relative to the goal and (2) to take corrective action to get back on course if they stray from it.

What is missing from many companies’ goals?

Many companies seem to lack the goals they need to reach their potential. I often start by asking a company’s decision-makers, “What is your goal?”, and, believe it or not, the most common answers are:

“To sell as much as possible” or “to make as much as possible.”

What’s wrong with that?

Well, these goals don’t give your staff (1) a useful target or (2) a benchmark against which to measure performance. The lazy ones will leave at closing time (or earlier) because they sold as much as they could within their comfort zone, and the workaholics will work until they burn out, because they can always sell and/or make more.

What kind of goals do companies need?

To solve these problems, companies must make sure the goals they set are measurable and challenging, but achievable. Measurable goals give everyone in the company a common target they can aim for and against which they can measure their progress. Challenging goals keep everyone interested, help prevent boredom and motivate people to reach their potential.

If they are too easy, goals will be reached with minimal effort and we will tend to create increasingly lazy workers, since laziness has worked for them. If they are too hard, goals will frustrate and disappoint employees, who find them almost impossible to reach.

What are the common goal-setting methods?

There are many different goal-setting methods. Three are the ones companies use most often. I call them…

1. The market potential method: Measure the potential of the market, recognise the limiting factors that keep you from capturing all of that potential, and work out the market penetration you are likely to achieve.
2. The historical method: Look at last year’s sales (or the sales of a similar business if you are just starting) and apply the rate at which the market is growing.
3. The full-time equivalent (FTE) method: Count how many full-time-equivalent people work in your business. Multiply that number by your break-even point per person. This gives you a rough estimate of your break-even point. Add a profit target to arrive at your measurable goal.

The market potential method is the best, because it looks to the future and requires companies to learn more about what is going on in their market, but it is also the hardest.

The market potential method

To use the market potential method, you generally follow these steps.

1. Define your market. The most common ways to define a market are by product, customer type, industry, geography, or some combination of these. Defining your market is not trivial, because it can be defined broadly or narrowly. For example, if you sell Greek yogurt, you can define your market very broadly, since you are in the health food market. You can narrow it to the yogurt market, narrow it further to the Greek yogurt segment, or further still to the fat-free Greek yogurt market. You may want to define it more broadly if you feel you can win customers from the larger segment, or more narrowly if you want to be extra conservative in your estimates or more focused in your marketing.
2. Measure the size of the market. Once it is defined, measure the size of the market, often in units and in euros. If you are lucky, you can find the figure quickly with a search engine. If you are not so lucky, you may have to estimate the number of people in the market, multiply that figure by the average consumption of the product in a year, and multiply by the average price.
3. Make adjustments. Since most markets are dynamic, you usually need to apply rates of expansion (or contraction) to the static market potential worked out in step 2. If you plan to go after an additional market, you need to add it. And if you plan to take share from your competitors (which is usually not easy), you should factor that into your market potential and plan.
4. Identify and quantify the limiting factors. Some factors hold back your company’s ability to capture the full potential of the market. The three most important are (1) competition, (2) limited resources and (3) government regulation. Others include an inexperienced management team, or the use of an unproven technology or method. Identifying the limiting factors is usually not that hard, but quantifying them is another story. Again, if you are lucky, you can find reliable data through a search engine. If not, you may have more tedious or costly work ahead. If your competitors are large listed companies, you can get their sales and market share data, and it will be relatively easy. If they are smaller or privately owned, it will be very difficult.
5. Determine your target market penetration. Subtract the effect of the limiting factors from the (adjusted) market potential to determine the market penetration available to you.

The historical method

Because it looks at past results, the historical method is not the best way to set a measurable goal. Even so, it is one of the most popular methods, because it is easier to apply than the market potential method. Using it involves the following steps.

1. Define the market and determine its potential. As with the market potential method, you should learn as much as you can about your market by defining it and determining its potential.
2. Past sales. If past sales follow a steady curve, you can use last year’s sales. If they don’t, you can draw a smooth curve using regression analysis, or use the “quick and dirty” approach of averaging sales over the last few years.
3. Apply the growth rate. Multiply the past sales (from step 2) by the growth rate of the market you have defined. The growth rate is usually found while doing market research. The result becomes your measurable goal.

The FTE method

The FTE method is based on knowing (or calculating) the number of “full-time-equivalent” people who work for your company. For example, if you have 5 full-time people (including yourself) and 2 part-time employees, you have the equivalent of 6 full-time people. As with the historical method, the FTE method does not look ahead.

1. Define the market and determine its potential. As with the two previous methods, you should learn as much as you can about your market by defining it and determining its potential.
2. Determine the number of FTEs in your company. Count the full-time people on your payroll and add the equivalent value of part-time employees.
3. Know or estimate your break-even point per person. Good managers should know their break-even point per person, because it gives them a good indication of the additional sales needed to justify the costs of hiring one more person. If you don’t know this figure for your company, or if you have just started up, a good rule of thumb is to use €50,000 (or equivalent), since that is a rough estimate of the average break-even point per person across companies of all sizes. *It varies a lot from country to country. In the US, that break-even point is around $100,000.
4. Determine the break-even point. Multiply the number of FTEs from step 2 by the break-even point per person from step 3 to estimate your break-even point.
5. Profit goal. Take your profit goal, which might be based on logic or on wishful thinking, and add it to the break-even point calculated in step 4. The result becomes your measurable goal.

Triangulate

If you want to feel more comfortable about your measurable goal, you can try all three methods and see whether they agree. If they do, you will feel more confident about the goal you have set. Whichever method you use, you need to develop a measurable goal and provide the logical support needed to sell it to others. The aim is to provide an end target at which your company can (1) aim and focus its resources and (2) measure its performance.

What happens next?

Once the measurable goal is set, determine the sales for each person who sells in your company. In the simplest case, just divide the company’s goal by the number of salespeople you have. The total of the sales quotas should be at least equal to your measurable goal and sales forecast. Most savvy executives set quotas a little higher. That way the carrots are placed a little further away, and nobody will complain if sales come in higher than forecast.

More importantly, the sales the company needs to succeed are more likely to be reached if individual sales quotas are set a little higher. This provides insurance in case one (or more) of the salespeople fall short of expectations.

Implementing the marketing plan

Once we have a measurable goal, we can devise the best combination of marketing strategies to reach it.

The first step to begin your journey successfully

A successful marketing plan starts with the right goal. If you can develop a measurable, challenging goal that helps you realise your potential, your thousand-mile journey will take you to the right place. As Sun Tzu, another ancient Chinese philosopher, once said: “Every battle is won before it is fought.” To win the battle, you have to draw up a really good plan. And good plans start with measurable, challenging and achievable goals.

This article is adapted from a piece by Ira Kalb that originally appeared in Business Insider.

Further reading

• 15 questions to evaluate a business idea
• 7 steps to define your market once you have a business idea

Featured image: Chen Hongshou, Public domain, via Wikimedia Commons.