Call: 01225 851 044 | contact us
Robert Craven Website

Let's Talk... More Profit Formulas

The one question that start-ups and new small business-owners should be asking, but very rarely seem to ask directly, is ‘how do I get more profit?’ by Robert Craven.

 

It never fails to surprise me that very few business-owners actually understand how profit is made, or rather how they can make themselves more profitable. They talk about profit but most don’t like to see their business purely as ‘a profit making machine’ – in their naïve world, the profit is supposed to fall out of simply ‘being good’ at what you do!  Unfortunately, nature is brutally honest, and if you have a lousy product, or you are lousy at selling your product…, then you will make few sales, make little profit, and probably become another business failure statistic.

The beginning of any discussion about profit always seems to revolve around sales.  The owner-manager asks, ‘how can I get more sales?’, ‘how can I get better sales?’, ‘how can I get more people to buy my product?’.

While the ‘more sales’ route to increased profits is obviously a clear starting point, it does fail to deal with what can only be described as ‘the mechanics’ of profit.

What is required is to step back and understand where the profits come from in your business.  Only then can you start to see the impact of changes to different parameters.  Let me explain:-

What is the impact of trying to get more customers in comparison to the impact of trying to reduce costs, or trying to get more profit per unit by, say, putting unit prices up?  Clearly one is more effective than the other but we need to understand just how effective each might be.

A PROFIT TOOLBOX

Rather than get stuck in the detail of the intricacies of how profit is created, I will take this opportunity to discuss simple but powerful ways in which you can improve your profitability.  The ‘profit toolbox’ uses a number of fundamental actions to impact your sales and profitability.  It interrogates you to see which actions you can carry out and how they would impact upon the business.  The toolbox encourages you to sort profitability, ideally, in the following order:

1. Increase prices – this gives you more profit per sale
2. Decrease direct costs - this gives you more profit per sale
3. Sort the under-performing suppliers/customers/staff; focus on the ‘best’ – this makes you more effective
   

"The Customers that leave are usually the difficult ones that buy on price alone"

Only then should you:-

4. Increase volumes – with a better business/financial model this now makes sense
5. Decrease overheads – this usually has the least impact on profits and damages morale so do it last.

Please note that when you do put prices up, the customers that leave are usually the difficult ones that buy on price alone – on the whole they are more effort than they are worth. This is a brave decision to take!

While a change in any one factor will impact on the profitability, the real power comes when you apply a combination of actions, which will give you a more powerful accumulative effect.

PIPELINE CALCULATOR

Another tool that can be used at the same time as the ‘profit toolbox’ is the ‘pipeline calculator’.  This will increase your sales volumes, but remember that increasing volumes is a waste of time if each sale isn’t profitable enough… At its simplest, this tool follows the journey that a potential customer takes and examines the efficiency with which you are able to process them through that journey.  For instance, the pipeline or funnel that they travel along might go as follows:-

• Leads: They visit your website/conference stand/seminar and see you
• Conversations: You have a conversation
• Proposals: You offer a proposal
• Clients: They become a client

The effectiveness at each stage of this process impacts directly on your profitability.  Improvements of a mere 10% at each stage lead to an improvement in successful proposals (ie new clients) of 46%.

So, what are we asking you to do to have such a dramatic impact on your sales and profit? 

• Is there a way you can get 10% more leads, see 10% more people?
• Is there a way you could be 10% better at the way you speak to people?  Go on a sales training course; find out how you can radically improve your business effectiveness by understanding how to talk to people in a way that will make them want to buy from you?
• Is there a way you could write better proposals?  A structured proposal format, focusing on the customer’s problems and how your solution is irresistible will improve your proposal hit rate.

Taking the same approach to each part of your business (breaking it down into its component parts) will get you to recognise how you can get large improvements in business performance from relatively subtle changes.

CUTTING TO THE KILL!

The following activities will significantly increase your profitability without the outside world feeling that you’ve radically changed your business.  So let’s go for it:-

• Increase prices by 3%
• Decrease direct costs by 3%
• Deal with under-performing clients/products/suppliers/staff – sack them
• Focus on high-performing clients/products/suppliers/staff
• Increase number of customer leads by 5%
• Increase customer conversion rate by 5%
• Increase number of purchases made by each customer by 3%
• Decrease customer attrition rate (the speed at which they leave you) by say 5%
• Decrease overheads by 3%

Try applying the maths to your business and you will start to see the sheer size of the impact on a business of applying such slight changes.

CONCLUSION

Your profit is inextricably linked to your sales and marketing efforts.  The greater the number of potential customers that you see, and the better you are able to get them to buy from you, will determine your profitability.  But first make sure your ‘business model’ stacks up.  Ignore the impact of small but powerful changes at your peril.

 

About the author

Robert Craven is a keynote speaker and author of the business best-sellers 'Kick-Start Your Business' and 'Customer Is King'. He has recently been described as 'one of the UK’s leading marketing specialists' and the 'entrepreneurship guru'. He runs The Directors’ Centre, helping growing businesses to grow.
For further information, contact Robert Craven on 01225 851044. (rc@directorscentre.com) www.directorscentre.com

©2006, Robert Craven.

publication details

First published in Start Your Business Magazine, Sept/Oct, 2006.