Increase Your Profits
When it comes to increasing the profit in a business, no matter what kind of business it is, there are several different drivers that can be manipulated to impact the net profit. Oftentimes business owners only focus on increasing revenue, but it’s really the profit that ultimately matters, the amount that hits the bottom line. Would you rather have $1 Million in revenue and a profit of $50,000, or $500,000 in revenue and a profit of $150,000? Both are possible, but I’d rather have a higher profit!
Before we get into the profit drivers, let’s start with some basics. The formula for profit is:
PROFIT = REVENUE – COST OF GOODS/SERVICES SOLD – OVERHEAD COSTS
If we further breakdown the formula and look at each of the individual pieces:
REVENUE = PRICE x QUANTITY SOLD = The gross revenue of a business is determined by the price they charge and the number of units sold or services provided.
COST OF GOODS/SERVICES SERVICES (VARIABLE COSTS) = These are the direct costs associated with products sold or services provided. If you sell a product, your cost of goods sold is made up of all the costs to make the product and get it ready for sale to the customer. If you sell a service, it is made up of all the costs incurred to provide the service, such as wages and benefits for your employees. These costs increase as the quantity sold increases, thus why they are often referred to as “variable” costs.
OVERHEAD COSTS (FIXED COSTS) = These are the general costs required to operate the business that are not directly related to the sale of products/services. This includes things like rent, office supplies, insurance, utilities, etc. These costs aren’t directly correlated to the level of sales and are typically incurred whether you have any sales or not, thus why they are often referred to as “fixed” costs.
Now that we have a better understanding of how we get to the profit of a business, we can dig into the drivers and how we can use them to INCREASE profit.
Revenue Drivers
The first drivers we will look at are the ones that will help increase gross revenue.
Getting more sales leads (Marketing)
This is the first step in the path to increasing revenue. If nobody knows about your product or service, how can they buy from you? The more people you talk to about your business, the more likely you are to have sales. But if the people you are talking to aren’t your target market, then we’re not working very efficiently. For example, if I sell baby clothes, then I want to make sure the people I’m reaching with my marketing efforts are people that have babies. The goal is to reach your target market and communicate to them how your product/service can solve the problem they have, so that they will engage with you to learn more, becoming a sales lead.
So the question is, how can you get more sales leads to fill your pipeline? It’s important to focus on things that will result in the MOST impact for the LEAST amount of effort. Think about how you are currently getting GREAT leads, not just any leads, the ones that are actually converting into sales. Where are the leads coming from?
Local networking events?
Referrals?
Advertising?
Speaking engagements?
Social media?
Direct mail?
E-mail marketing?
Once you identify where they are coming from, make a plan to do more of that! And if some of your efforts aren’t bringing in quality leads, then STOP DOING IT! Just because everyone else is doing social media doesn’t mean you have to if it’s not resulting in new leads or some other benefit. We only have a certain amount of time in our days, we need to focus on things that give us the most bang for our buck.
Converting more leads to sales (Sales)
Once people are in your sales pipeline, meaning they have expressed some level of interest in your product or service, your goal is to convert as many of those to sales as possible. If you’re getting a lot of leads but you’re struggling to get them across the finish line to buy from you, then you need to examine your sales process.
Are you effectively communicating how your product/service solves the problem your customer has?
Is it easy for people to buy from you? If the buying process is too complicated you may be losing customers.
Do you have a system like a CRM in place to track and follow-up on the leads that you get?
Do you have more leads than you can handle, and you need to hire someone to help with the sales process?
Consider keeping track of the percentage of people that go from lead to customer and how long that process takes on average. Think about what you can do to improve both of those metrics.
Getting customers to spend more (Marketing)
Once you have a customer that has actually purchased something from you, look at what can you do to get those existing customers to spend more money with you. They already know, like and trust you, so it’s much easier to sell to them than it is to go find new people that have never heard of you. Do you have other products/services that might be of interest to them based on their previous purchases? Are there add-on products/services that would be of interest to them?
Getting customers to spend more frequently (Marketing)
Similar to getting customers to spend more, this driver also builds off of the fact that your existing customers already know, like and trust you. Look at how you can get customers to buy from you more frequently.
If your product/service is something they will buy more than once, how can you make sure they buy from you again and as frequently as possible?
Can you implement a process to follow up with customers at a regular interval?
If you’re a service-based business, can you schedule their next appointment before they leave rather than relying on them to schedule an appointment at a later date?
Can you offer a frequent buyer discount?
How do you stay in front of your customers so that when they are ready to make another purchase, you’re the one they buy from?
Getting customers to remain customers for longer (Customer Service)
This driver really boils down to a simple question – once you have a customer, how do you keep them as a customer? As we’ve talked about above, it’s much easier to sell to people who have already bought from you than it is to go find new customers. So think about what you are doing to keep existing customers happy so that they remain a customer and continue to buy from you.
If they have questions, is it easy for them to reach out to get support?
Do you communicate with them on a regular basis so they know what is going on with your business?
Do you let them know about new products/services?
Think about companies that you are loyal to, what types of things do they do that make you stick with them?
Pricing for maximum profit
All of the above drivers deal with the number of sales you have. Pricing is like a super driver, because it can have an exponential impact on your total revenue. If you sell 10,000 units of an item, and you increase the price by $5, that’s an extra $50,000 without changing anything else. The key with pricing is to get the maximum amount of profit, which can get tricky because you don’t want to undercharge and leave money on the table, but you also don’t want to lose customers because the price is too high.
Pricing strategy is specific to each business and the product/service you sell. There are tons of books and theories on pricing strategies, so I can’t dive into a lot of detail here, but as you’re looking at your revenues, ask the question – Can we increase our revenues by increasing our prices? There is always a risk that if you raise prices, you may lose some customers, but if the overall increase in revenue offsets the few that you lose, then it can still be worth it in the end. And sometimes it can be an effective way of getting rid of those PITA customers that are high maintenance and always complaining no matter what you do. Also, as the price increases, the number of individual items you have to sell to hit the same revenue goal decreases. Do you want to sell 100 at $1,000 each or 1,000 at $100? They both add up to $100,000, but may take very different levels of effort.
Expense Drivers
The next couple of profit drivers we’ll look at have to do with the expense side of the profit equation.
Variable Costs (Cost of Goods Sold/Cost of Services)
As we discussed at the beginning, variable costs are directly correlated to your level of revenue. As revenue goes up, so do the costs. If you’re a service-based business, as the amount of services you provide or number of clients you have increases, you have to hire more employees to provide the service. If you’re a product-based business, the more products you sell, the more you have to produce or purchase. Therefore, you can impact your profit by working to reduce your variable costs as a percentage of revenue.
A few things to consider:
Negotiate with your supplier or change suppliers to get product at a lower price.
Hire employees at a lower pay rate to do some of the lower level work, rather than having your highly paid employees do all the work.
Outsource some or all of your production.
Fixed Costs (Overhead)
Since your fixed costs don’t increase in direct correlation to your sales, the more you can decrease them, the more money that goes straight to the bottom line. Review your overhead costs and see where you can make adjustments or negotiate your costs.
Outsource some of the administrative functions.
Cancel services and software subscriptions that you aren’t utilizing.
Shop around for better rates on some of your recurring services – phones, merchant services, insurance, etc.
Cut back on discretionary spending like business meals and travel.
Re-negotiate your lease or find less expensive office space.
Systems and Efficiency
The last profit driver is related to all areas of the business – your systems and efficiency. Make sure that you have appropriate systems in place so that your internal processes are efficient. Time is money, so wasted time in any area of your business impacts your profit. There are several areas within your business where you should evaluate your internal systems and processes for efficiency, and most of them relate to areas that we have discussed above. Each business is unique, but here are some common areas to consider:
Marketing
Sales
Customer Service
On boarding of customers (service-based)
Production/Fulfillment – the making of products or provision of services
Operations/Back-office
Human Resources
Finances/Accounting
As you can see there are a lot of different ways that you can tackle the goal of increasing your profits. It can be overwhelming to try to address all of them at once, so pick a few to focus on to start and then go from there.