A Simple Method to Identify your Revenue Bottlenecks

There's an apocryphal Lincoln quote something along the lines of, "Give me six hours to cut down a tree, and I'll spend the first four sharpening the axe".

Actual source aside, it's a useful idea that gets to the heart of an issue many business owners often face -

There's a problem somewhere limiting growth, but you aren't sure exactly what or where it is.
Maybe things aren’t going ‘up and to the right’ as they were only recently. 

A typical reaction is to start trying all sorts of new marketing tactics.

Chasing the current marketing fad, or investing resources into too many different channels at once.

Given six hours to cut down a tree, this is like blindly swinging around a blunt axe. 

The analogy seems tenuous, but if you think about it, this is what it looks like from the outside. There’s no real focus to what’s being attempted, and no precision in how it’s carried out. 

The alternative has more in common to the plan from the opening quote.

Spending a lot of time identifying and preparing for the problem; sharpening the axe. Finding the best way to fix the problem, then going about it to execute accurately and efficiently.

In this article, I’m going to walk through two tools I regularly use to help me do the latter.

They've served me time and again in helping correctly pinpoint exactly where the bottleneck is in a businesses growth, from which point one can use their experience to easily come up with a plan to improve it.

Don't blindly swing around a blunt axe.

By understanding how the following two tools work together you’ll gain a crystal-clear understanding at what’s affecting your revenue.

Your thoughts will be more focused, your decisions will likely be more accurate and you’ll execute more confidently, certain you’re working on the right thing to grow your business.

1. The Theory of Constraints.

Eli Goldratt's 1984 book The Goal is a classic on business management.

Set in a fictional production plant that's chronically late and in a general mess, a management consultant helps the factory owner solve his ongoing problems using an innovative management style.

Goldratt uses the narrative to introduce his now widely used Theory of Constraints, which breaks down any system into smaller components that each contribute to a total output.

The Theory of Constraints is similar to the saying that "a chain is no stronger than its weakest link".

The theory instructs business owners to identify which of the components is the weakest in the system they’re managing, then to focus all their energy on improving that bottleneck in order to improve the total output of the system.

Author and Consultant Taylor Pearson has written extensively about the Theory of Constraints. He describes the process not only in how it affects business, but across many areas of management.

Source: Taylorpearson.me

Using an example of improving your health and fitness, the output of your efforts is a function of the three equally important components of diet, exercise and sleep. 

A deficiency in any one area affects the total output of the system. The Theory of Constraints illustrates that your output is really only as strong as the weakest component.

Using the Theory of Constraints is a useful model in aiding you in identifying where your current bottleneck is, and where to focus your improvement efforts to create the best possible total output.

2. The 80/20 Tactical Triangle

The Theory of Constraints is a helpful mindset shift, but the difficulty in applying it effectively is in identifying what the individual components of the system actually are.

Luckily, in a sales and marketing context, those components are always the same.

Perry Marshall's "80/20 Tactical Triangle", described in his classic book 80/20 Sales and Marketing, breaks down your marketing “system” into its three distinct components: Traffic, Conversion and Economics.

80/20 Tactical Triangle

There are two benefits in using the Tactical Triangle to help uncover bottlenecks:

1. It provides the components of your system output. 

As we just covered, you can know for sure that these three components cover all the possible levers for influencing the final outcome. As some might put it, they are mutually exclusive, collectively exhaustive.

Think about it: you always need an availability of prospects for a given offer (traffic), you always rely on a percentage of those prospects ‘raising their hand’ to show interest in that offer (conversion). And finally, the feasibility of your business depends on being able to do this profitably and at scale (economics).

In accordance with the theory of constraints, a limitation in any one of these areas will result in a deficiency in the total output of your marketing efforts. 

Thinking about your marketing ‘system’ this way simplifies the way you look at things and enables you to easily make better decisions about where to focus your efforts for maximum results. 

2. It provides further areas of focus

At the core of the Tactical Triangle (and what Marshall would stress as the more important aspect), is the "80/20" distribution or 'Pareto Principle'.

The Pareto Principle states that "80% of results come from 20% of effort". The principle takes its name from the Italian economist who observed that roughly 80 percent of the land in a region was owned by 20 percent of the population.

This same distribution occurs in many systems all around you everyday, and you may not even realize it

20% of sales people are responsible for 80% of sales revenue, roughly 20% of a population produces 80% of the following generation, and, crucially, 20% of marketing efforts produce 80% of revenue outcomes.

The value of the Pareto principle is that it allows you to easily determine what’s currently working within a particular constraint. Once you know that, you can focus your efforts on improving that 20% to produce more outsized outcomes.

To illustrate this in practice, take a look at your own Google Analytics dashboard

Set the date range to the past year. In the right hand column go to Behavior > Site Content > All Pages. Arrange your ‘unique users’ column by descending order.

While it may not be an exact “80/20” ratio, I’m confident you’ll find that across all the pages of your site, a vast majority of your total traffic comes from just a handful of pages.

How is this useful? Think: what do these top pages have in common? What sets them apart in their headlines, messaging or value that makes them more successful than the others on your site.

To quickly recap:

  • The Theory of Constraints allows you to first determine what the bottleneck is, by breaking down the problem area into being either conversion, traffic or economics. 
  • Then the “80/20 Tactical Triangle” allows you to zoom in and double down on what’s actually already working in each area in order to improve the weak constraint. 

In order to better explain how to apply this concept let’s look at a real-life example:

Putting It All Together: An Applied Example

I recently worked with strategy consultant turned course creator Paul Millerd to analyze his business and help improve product sales.

This should serve as a short example of combining the two tools and gain a clear overview of the most effective avenue to improve revenue. 

1. Finding the Constraint

After collecting some data sources, the next step was to analyze the data to get a clear picture of whether the limit to growth was Traffic, Conversions or Economics. 

Traffic was analyzed first.

Modest traffic itself isn’t usually a sign of a constraint. 

If traffic is a constraint, you’ll often see it immediately - no traffic, no conversions, no business. Getting some traffic is always step one. 

But focusing on simply getting more traffic is a common mistake that leaves a lot of business owners frustrated. 

Focusing on traffic too early when the rest of the system is constrained is inefficient and a waste of time. 

In reality, it’s usually either conversions or economics that create the biggest impediments to “growth”. 

In Paul’s case, traffic was consistent - he was in a good position with a mix of organic and referral channels all flowing to his blog content. 

This meant the constraint had to be either economics or conversion. 

Economics, as a constraint, is often given away by good conversions across the board, and decent traffic.

In the case of an economics constraint, it’s solved by improving the lifetime value of a customer by improving either purchase frequency, volume and value.

Legendary marketer Jay Abraham's classic advice is a third tool I often use to aid clients in solving economics bottlenecks:

"1. increase the number of clients, get more new prospects into paying customers. (purchase volume) 
2. Increase the average transaction, get each client to buy more at each purchase (purchase value) 
3. Increase the frequency that the average client buys from you, get each customer to buy from you more often (purchase frequency)"
The Three Levers for Improving Revenue. Helpful for solving economics constraints. 

Conversion was considered next.

When analyzing a conversion constraint, it’s helpful to visualize your funnel and consider all the potential “drop-offs” points for a customer.

This could be a path with drop-off points that include visiting the site to convert to a subscriber, subscribing to opening an email, clicking a link in an email, viewing a sales page, to checkout, and so on. It will be slightly different for every business, so think about where these points occur in yours. 

To help get started, broadly, conversion quality can be found in metrics like percentage of traffic to email subscribers, email subscribers to buyers, as well as email open and click through rates and sometimes average pages per session. 

In Paul’s case, email open and clickthrough rates were particularly strong, meaning his messaging was strong and his audience engaged. 

However, when looking at the email channel in google analytics, there were few conversions. This told me that while email was potentially a viable channel, there was an opportunity to improve email to buyer conversions. 

Also, looking at the average new subscribers added each month compared to overall traffic, I could see a low conversion percentage. This indicated that somewhere on the site there was a conversion issue leading to less than desirable traffic to subscriber conversions. 

2. Finding the Focus

I was now pretty certain that the constraint for Paul was Conversions. 

The next step was to find where the 80/20 Pareto distribution was hidden inside this constraint. This would allow me to know where to focus efforts for the biggest results. 

Starting with the low traffic to subscriber conversions, I searched in analytics first for the top pages, (just as I recommended in the section before this: Behavior > Site Content > All Pages).

The results were typical in that a small handful of pages were receiving the vast majority of traffic. 

These pages would be great areas of focus to see results fast - without having to apply my assumption to every page on the site. 

For the low subscriber to buyer conversions, I knew Paul only had a basic email sequence. To improve this conversion percentage we simply needed to add more opportunities for conversion. 

With this information, it was easy to recommend building a simple email sequence to get started with a more robust email marketing strategy, and also add more visible lead generation on those top pages that were receiving the majority of the traffic. 

Book your Free Marketing Consultation

Interested in discovering the constraints to your marketing strategy?

Limited to those who've read through this article, I'm offering a free 1-on-1 session where we'll walk through your business and identify exactly where your limits are and how to fix them (just like I've outlined in this post).

You'll walk away with a valuable demonstration of exactly how to uncover problems in your business you can use in the future, as well as actionable ideas for where to apply your efforts next in order to improve your revenue and keep growing.

Book a call now at a time that suits you, and I'll show you exactly where you should be looking to unlock the revenue hidden in your business.

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