Business Metrics: Transaction Volume

September 2002 Marketing 1 Comment

When measuring market volume, markets are usually measured by unit rather than transactions. While this historic basis for measuring markets has proven useful for many business people, sales and marketing teams in B2B businesses should consider replacing the unit sales metric with the transaction metric. The reason is that transactions are the points that sales and marketing directly influence.

Measuring markets according to number of transactions versus number of units will not change the overall estimate of the market size. To get an estimate of the market sizes, the standard methodology is to take the product of units sold and price per unit. This same estimate can be derived by counting the number of transactions and the average price per transaction. As such, measuring transaction volume versus unit volume would appear to be equally valid metrics for deriving the market size.

If market share is determined by the number of units, switching to a market share by transactions would affect the description of market shares. For many industries, market shares have been evaluated according to unit shares that reflect either the volume sold or size-of-install-base. Changes in market share are reported according to the difference in unit share in one year versus the unit share in the second year. Evaluating market shares by share of transactions will yield a metric that more closely represents gains and losses of market share, rather than overall market share. To clarify this metric, the transaction share should be measured according to segments, since some segments have larger volumes than others.

Operationally, most project managers and line managers and accountants would rather manage unit sales or billable hours than transactions. Operations managers have grown accustom to managing the production of units or managing a team for deliverables. Also, operational teams will have little influence on transactions. Perhaps the technical expertise origin of most B2B businesses is the reason that they still track units and billable hours, but this is an insufficient reason to make unit sales and billable hours the only metric for the company.

The two above comparisons of unit metrics versus transaction metrics are insufficient reasons to change and operational teams would prefer to continue tracking unit sales, so why should transactions be measured? Because transactions are the point of influence for sales and marketing teams.

For consumer markets, quantifying unit sales directly corresponds to quantifying the number of people that have become aware of the value offering, conducted an investigation of its benefits, and made a choice to purchase. Unit sales and transactions are roughly the same metric for most consumer markets. However for business markets, many units are sold in a single transaction for some value offerings. Quantifying the unit sales, or billable hours for service driven companies, does not translate to quantifying the number of individuals that must be contacted, opportunities that must be qualified, and transactions that must be closed. As such, unit sales are a less valuable metric for B2B markets than transactions.

In measuring transaction volumes and transaction sizes, sales and marketing teams are better able to design their marketing plan. For instance, high-volume/low-value transactions require streamlined/low-touch sales and marketing approaches while low-volume/high-value transactions require greater personal attention from the sales and market team. In particular, a low-volume/high-value transaction deserves the same level of attention from the sale and marketing team regardless of whether this transaction involves a single unit or several million units. By measuring units alone, some individuals may miss this fundamentally important fact.

While the above example is rather obvious, the value of measuring transactions versus units continues throughout the entire marketing plan design. How the market is contacted, the complexity of the sale, the need for technical experts, the need for legal involvement, and other aspects will reflect the transaction size and transaction volume more than the unit size and unit volume. Also, the opportunity for growth is directly determined by the opportunity for transactions in many industries. Focusing on transaction volume feeds the focus on growth.

Unit sales may be fine for consumer markets or operational plans, but B2B sales and marketing teams should measure potential transactions, closed transactions, and transaction share.

Also Appearing in

The May Report, TECH BUSINESS BRIEFS, Sept. 24, 2002

About the author

Tim J. Smith, PhD is the Managing Principal of Wiglaf Pricing, and an Adjunct Professor at DePaul University of Marketing and Economics. His most recent book is Pricing Strategy: Setting Price Levels, Managing Price Discounts, & Establishing Price Structures.

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