Thinking About Your Economic Denominator

I get a lot of questions about the economic denominator—how we should think about it; how you connect all the pieces of the business to it; do you need to cascade it down into different layers of an organization; so on and so forth. The answer is ultimately, yes, you do want to connect operations of your business, coming up with subcomponents that roll up into it and beginning to put together a lot of parts that ultimately add up to the overall economic denominator. Those are just sort of sub-pieces, if you will. Those are just bricks in the wall once we have that understanding. 

But the really key thing is to understand, or to grasp, what is the point of the search for the economic denominator? The point of the economic denominator is not to have yet another, if you will, tagline for programmatic change. Rather, the point of the search for the economic denominator is—let me use an analogy. Think of your economics at their very best as having underlying laws of physics about them, if you will, if we can just discover what they are.  

You know, just as a scientist—just as Newton or Einstein figured out the laws of physics underlying how the universe works—they understood, for example, that F=ma, or that E=mc2. They understood some underlying principles of the way the world actually works. Then, with that understanding in mind, we could apply them to figure out how to make airplanes fly or how to build bridges or how to deal with space travel—whatever. Okay? So, those may become decisions that flow from that understanding once we have it.  

What you want to do is to think about the search for the economic denominator the same way; when you put your finger on the economic denominator, it’s like gaining piercing, deep understanding of the laws of physics of how your economics actually work. Not the way you want them to work, any more than E=mc2 reflects the way Einstein wanted the universe to work. No. It’s to understand the way the universe actually works. Your economic-denominator search is an attempt to put your finger on the way your economics actually work. Not the way you want them to, but the way they actually do. Then, with that penetrating understanding, you can begin to make a whole series of decisions.  

So, when you get your economic ratio, your economic denominator, whether it be profit per customer visit—take a look at Walgreens. Their notion of profit per customer visit is the E=mc2, or the F=ma understanding as to how their economics work at their very best if they’re able to capitalize on that understanding. And with that understanding, they’re able to make all sorts of decisions—all kinds of engineering decisions, if you will, about how to build their system, about how to build their customer base, about how to build their stores—that over time create momentum in their flywheel.

So, think of the search for the single denominator as saying, “Gee, if there is one, what might it be? What are the options? What are the sensitivities of those options? What empirical evidence can we marshal to support that it is really one denominator versus another?” Once we have that breakthrough in understanding—deep, penetrating, piercing, scientific understanding—of the way our economics actually work, we can use that understanding to produce the best results possible over time. That is really what the denominator is all about.

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