Do you want to increase profits in your business? Well, who doesn’t?
But when you ask other business owners how they would do it, you typically will get two types of answers:
- “Get more clients” (often in the form of ‘increase your marketing’)
- “Cut your costs.”
And come think of it, these two answers seem to contradict: Increasing your marketing would probably increase your costs, while decreasing your costs means typically cutting expenses, including on marketing or on the other perks that your customers have started to appreciate.A major business coaching franchise decided to break this conundrum by suggesting a simple ‘Five ways to profit’ formula which goes as follows:
(Leads * Sales conversion = Clients. And Clients * Average $ sale * Number of transactions = Revenue.)
Revenue times Margins = Profit.
In other words: Leads * Sales conversion * Av $ sale * Number of Transactions * Margins = Profit.
What is good about this formula is that it breaks the simple ‘either decrease your expenses or increase your marketing’ statement. It becomes clear that you can also increase your profit by focusing on how often your clients will use your services. Or that you need to upsell, or become a better closer. What is not good about this formula is that it still misses, or over simplifies several essential elements that are the basis for profits.
The true formula for profit in a certain time period is based on eight ways that affect profit, not five:
(1) Leads, (2) Sales Conversion, (3) Customer Retention, (4) Average $ Sale, (5) Number of Transactions, (6) Collections and Cash Gap, (7) Gross Margin or Variable Costs, (8) Overhead or Fixed Costs
And before you dive into the formula, there is a likely order of getting more bang for your buck.
- At the very first: measure very element of these eight ways. What you cannot measure, you cannot improve!
- Improve your Cash Gap and your Collections. CASH = KING
- Address expenses in two ways: first cut any needless overhead (usually in the so called ‘Fixed Costs’), secondly, address time wasters as they effect the gross margin (and probably mean you can work with less overhead as well)
- Keep your customer Retention high! It is so much easier to make money from existing clients than trying to get new ones in. Never lower your service and quality standards! Make them happy and they will be more likely to give you referrals.
- Now work the average dollar sale. Maybe you can upsell a bit, or change your prices. Be aware though, pricing is the sharpest tool in your toolbox. It can make, or break you. Make small changes and test and measure.
- Time to work the Sales Conversion rate. When was the last time that your sales force was retrained?
- Now see if you can get your customers a bit more often in the door by increasing the number of transactions. Note that this requires reaching out to your existing clients, which might cost some money
- Lead generation is the last area to work on, and unless you know of low price marketing strategies, the most expensive. It is typically also the one that is basically unlimited.
For those who want to see the full eight ways formula:
(1) Leads * (2) Sales Conversion Rate = (A) New Clients
Old Clients * (3) Retention Rate = (B) Remaining Clients
Total Clients = (A) + (B)
Total Clients * (4) Average $ per sales ticket * (5) Number of Times they buy = Sales Revenue
Sales Revenue – (6) Collections % <and cash gap> = Collected Revenue
Collected Revenue * (7) Gross Margin = Gross Profit
Gross Revenue – (8) Fixed Costs = Net Profit
Note that there are over a 1000 recorded strategies that increase profits, all of them somehow fitting in one of these eight ways. If you don’t know where to start, ask a business coach for whom this eight way formula with its 1000 strategies is day to day stuff to get you going.
After all, who doesn’t want more profits? 