The Art of Business Analysis - Part 1

Building your first metrics tree

When I was a business analyst circa 2015 I had no clue how businesses worked despite the MBA degree I had received a decade earlier. Back then I used to think that analyzing a business meant analyzing various metrics and coming up with stories that explained those metrics.

I did my best, but ultimately failed and decided to focus on data engineering instead.

Almost a decade later, I have discovered a number of analytical frameworks and tools that I know for a fact would have helped me succeed. I would have become an expert analyst and a trusted advisor to the executive leadership.

And so I’ve decided to write this post as a message to my younger self.

The most interesting of these tools and frameworks is the Metrics/KPI Tree. It's the best tool I know for understanding and communicating business context.

I’ve written about it in the past and since then, I’ve seen that people are very interested to learn more about it. What I want to do is write a series of posts (directed to my younger self) where I walk through the steps of building it from scratch.

I’ll be using a business case study I saw in a video by Alex Hormozi where he advises a business owner of chiropractor studios on reaching the goal of $5 million in EBITDA in 3 years. Of courtse I’m no Alex Hormozi, I don’t have his experience running and growing businesses, so this is just my take.

The link to Hormozi’s video is at the end of this post.

Business Overview

The case study concerns a business called Chiro 1st which comprises a number of chiropractor studios in and around Washington state.

These are physical locations where doctors perform chiropractic treatments for patients, such as various adjustments, rehabilitation and spinal decompression. The owner states that spinal decompression is their unique value proposition.

Since this is a physical business (as opposed to a digital one) we can immediately draw several conclusions:

• The business is capital heavy and there’s quite a bit of risk involved. In order to open a new location you need a fairly large, upfront investment to buy equipment (X-Ray machines, chiropractic equipment, exercise equipment, computers, etc)

• Operating expenses are also quite high and also necessary upfront (doctor’s salaries, staff salaries, location rent, utilities, etc)

• Just like any other physical business, the location of the facilities matters a lot. It needs to be accessible, convenient, accommodating, well designed, etc. As they say in real estate the key is location, location, location. This means you’ll also need to invest upfront in construction.

Business Model

The business model is quite simple.

Patient comes in for an initial assessment (free consultation, X-Rays, etc.) after which they are presented with a treatment plan consisting of several visits to the studio. Every time they get a treatment, their insurance is charged providing revenue for the business.

While not exactly a recurring revenue model, it’s the next best thing—reoccurring revenue—which means that the same person pays multiple times. This is a huge positive element Hormozi highlights during his analysis. The treatment plan is offered as a package of several visits as opposed to what he terms “one crack at the back at a time.”

Here’s a brief summary of this business:

• There are currently 6 chiropractor offices in WA offering services

• Only 4 of the 6 locations offer the special spinal decompression service

• The “front-end offer” is a free consultation and treatment plan

• The “back-end offer” is a treatment package that ranges from $2,400 to $3,600 over a 60 - 90 day period

• 1 in 7 patients choose a special $10,000 treatment in the case of an injury

• Revenue is about 70% from insurance and 30% payment upfront

Metrics / KPI’s Overview

Next let’s go over the metrics / KPIs and see if we can’t get a better idea about this business.

Top line

• Top line revenue per location: $5.2 million

• Net profit per location: $1.2 million which means

• Net margin: 1.2/5.2 = 23%

Acquisition

• Monthly marketing spend: $1,500-$2,000 per month

• Total new leads avg: 35 per month

• Total shows for free consultation: 28 (80% show rate)

• Total sales for full treatment: 20 (71% close rate)

• Customer acquisition cost (CAC): $700 per year

Retention

• Lifetime Value (LTV) per customer: $3,400

• LTV/CAC ratio: 3400/700 = 4.8

In a previous post I wrote that understanding demand is key to understanding the business context, so let’s do that next.

Understanding Demand

Demand is at the heart of any business. I mean that in the literal sense, without demand the business cannot survive. However demand finds itself ignored by many

Why do people go to a chiropractor?

The obvious answer is of course that they’re in pain (e.g. back pain). But having back pain doesn’t necessarily suggest you’ll choose a chiropractor. You might very well choose over-the-counter pain medication, some kind of therapy (like a hot/cold pack), physical exercise, stretching or even surgery.

So why then choose a chiropractor?

The context in which a chiropractor becomes a viable solution is one where perhaps medication has failed to relieve the pain permanently, simple therapies, stretches and exercise haven’t worked, your doctor is recommending surgery (which carries significant risks) and you’re thinking “there’s got to be another option.”

So you search online, you see an ad or a friend tells you about seeing a chiropractor.

You might have never been to a chiropractor before, you might have heard about them, watched a few videos on YouTube, you might even have anxiety about going there because the pain might get worse, or something else might go wrong. But in the face of surgery, you’re most likely thinking a chiropractor is much better than “going under the knife.”

Why is all of this important?

It’s important because in order to generate or capture demand you’ll need to buy ads and those ads need to mention what JTBD calls “the struggling moment” as well as handle all the fears and anxieties directly.

Their ad actually reads: “Avoid surgery, try spinal decompression”

Next you’ll most likely check out their landing page to make sure they’re reputable, read a few reviews and make a decision whether to book a free consultation or not.

Mapping the Value Chain

These are the first steps in what most people call the “customer journey” which I prefer to call the “value chain” because the customer must receive some value in every step in order for them to buy your solution.

Here’s the value chain of Chiro-1st as best I understand it. Let’s briefly walk through the steps in order to understand how the customer gets value in each step until they receive the ultimate value: pain relief.

The reason I like to call this “value chain” is because the customer receives some value at each and every step, until they receive the ultimate value: pain relief.

Customer sees the ad

It all begins when a potential customer has physical pain they can’t deal with themselves. This could be from an injury, over exertion or something chronic. They either see an ad or they actively search for ”chiropractor in my area”

Viewing the ad gives them hope that there’s relief available for their condition. Assuming the ad or the landing page handles their concerns and fears, they will click or call to book a free consultation.

Booking the free consultation

As you can see there are two paths from the ad impression. They could either click to book a free consultation online or click to call whereby a representative books the consultation for them. Once booked, they’re entered into a reminder system which calls, texts or emails them the due date.

Having a definite date in the future where their problem might be solved provides tremendous emotional relief and hope again creating some modicum of value. We know that about 80% of them show up for the free consultation. According to Hormozi, this is an excellent show rate.

Booking the paid treatment

Once they show up for the free consultation, the staff takes an X-ray, checks their insurance information and provides them with a treatment plan. This is when the offer is presented and the sale occurs. This business has about a 70% close rate.

Armed with a treatment plan the customer’s fears and concerns are reduced even more, while hope of relief increases. Another modicum of value.

Getting the treatment

Now that they’re booked, they need to show up for the treatment in order for the business to make money. Given that the treatment involves multiple appointments, they need to show up for each one.

Positive health outcome

While the customer needs to show up regularly to receive more treatment, having even a tiny bit of pain relief and the promise of a full resolution in the future provides tremendous value.

Assuming a positive health outcome, the customer is satisfied and satisfied customers come back in the future, write good reviews and are much more likely to recommend chiropractic treatment to their friends.

Bulding your first Metrics/KPI Tree

Now that you understand the value chain, all you have to do is put some metrics in each step and build your initial metrics tree. It might not be complete, but it’s far better than having nothing.

Next week I’ll give you another framework for improving your business context understanding and getting a more complete metrics tree.

Here’s my first tree for Chiro-1st. Feel free to make your own or use this and adapt it to your situation.

Here’s the video in case you’re interested.

Until next time.