business coaching

4 Pillars of Profitability

4 Pillars of ProfitabilityProfit is a much talked about subject, as business owners we all want to have a ‘profitable’ business, a business where we are making money. That money, the profit, is the thing that will provide you with the opportunity to have the things that you want from life assuming you are making enough of it.

What is profit?

In this case we are referring to the surplus that might exist when your business costs have been taken away from the revenues you receive from selling your product or service.

Profit = Revenue – costs

We are not talking about what an accountant might report as profit,which can be altered significantly by accounting such as depreciation of assets, write offs or special one off actions.

By looking at the equation, it can be seen that to increase profit you need to do one or both of the following, increase your revenues or decrease your costs; decreasing your costs increases your margin.

How do you increase your revenues?

There are three ways that you can increase revenues, all methods and techniques that I have heard about fall into one of these three categories. The three are as follows:

  • Increasing the number of customers coming into your business
  • Increasing the average transaction value
  • Increasing the number of times a customer buys from you

Let’s examine those in a little more detail

Increase the number of customers

Number of customers is the product of the number of prospects (potential customers) you have multiplied by your conversion rate.

Therefore, if you wish to increase the number of customers you need to increase the number of prospects you have and/or improve your conversion rates.

In my ebook, “SPARK your business into life” I have covered the Ignition Coaching SPARK process for creating more prospects and highlighted the need to measure and review key metrics in your business. If you are not tracking the effectiveness of your prospecting, marketing and sales processes you will not know what is and what is not working for you. Therefore, you will not know what to keep doing because it works and what to change to improve your results. Drop me a line if you would like a copy of “SPARK your business into life”

Increase the average transaction value

If someone is already buying from you, one of the easiest ways to increase your revenues is to increase the value of the transaction they are making with you. Upselling, cross-selling and creating packages of products or services are amongst a number of strategies that can be used to do this.

Think of outlets such as McDonalds with their question “Would you like fries with that?” (cross sell), “Would you like to go large?” (upsell). People are already buying with a simple question McDonalds will create an opportunity for you to spend more money and for what is a relatively low additional investment you get more.

Increase the number of times a customers buys from you

Here you are looking for repeat sales. Once someone has bought from you, as long you have given them great value and service, they are already predisposed and more likely to buy from you again. It is far more cost effective to get existing or past customers to buy again than it is to have to keep attracting new customers into your business.

Simple techniques such as keep in touch with them, loyalty schemes, customer only events, upgrades and replacement offers are amongst the many options available to get customers to return

Increasing your Margins

The other operator in the profit equation is costs, these act to reduce your profit. Costs are typically classed as variable (directly associated with selling your product or service) or fixed (that do not vary within usual circumstances with sales activity).

By decreasing the costs directly related to producing and promoting your product or service you will increase your margins; that being the amount of revenue you retain from each transaction.

Examples of variable cost are prices of raw material or labour directly associated with making or delivering your product. Fixed costs are things such as overheads (rents, support staff salaries)

Reducing costs is a viable way to increase business profitability. However, it is likely to a more limited opportunity that increasing revenues as all businesses have a level of overhead and costs associated with operating.

There are a number of tools that can be used to eliminate waste and reduce costs. For example, negotiation, volume related savings, reducing inventories, reducing processing times & activity and quality improvements (reducing warranty and returns).

Small changes in each of these areas discussed above can have a significant and compounding impact on your profitability.