Author: Stephanie O’Brien
Revenue doesn’t matter, profit margin does. So, that must mean more money coming in, equals more money in the bank, right? Not always.
Smart business owners are always focused on profit.
Without profit margins, it makes zero difference if you have an abundance of sales transactions or if your gross revenue is increasing – every business will eventually run itself into the ground. On the other hand, forward-thinking entrepreneurs understand that the key to true success is to combine a profit-making strategy with a vision of personal fulfillment.
One of the most common questions I get is, “How do I increase my profitability?”
You don’t need more money to increase your profits but you do need to pay attention to the things that matter. There is a formulaic representation for this created by ActionCOACH founder Brad Sugars, and it works! It’s the formula for putting money in your jeans and creating more profit in your business, and it works for ski resorts, cafes, franchises and marketing agencies; it is the chassis of all businesses.
Leads
X
Conversions
=
Customers
X
Average $/transaction
X
Average Number of transactions
=
Revenue
X
Margin
=
Profit
The tendency to start at the top of the formula is common. We all want more leads but we also know that marketing can be expensive. Trust me, as the owner of a marketing agency this is counterintuitive advice for me to give. But, you have to recognize that providing more leads to a business that can’t sell is only going to add to the chaos and not to your bottom line.
So, how do we increase profits without spending any more money? We start at the bottom of this formula with margin. We actually need to work simultaneously on leads, conversions, transactions, and margins, but let’s start with the least obvious and most efficient one in order to increase our profit – margin.
Review your expenses
Conduct an expense audit once per quarter. To trim expenses, try auditing your administrative functions. Are there routine tasks you could afford to outsource or eliminate to save money? Look at marketing expenses. Do you have a marketing budget? Do you know which of your marketing activities drove an ROI last quarter? Do you know which of your marketing activities is your most profitable? Review every subscription you have. Do you need it? Can you share the subscription with a similar company and reduce duplication?
One way to cut costs is to hire contractors or outsource tasks. When you do this, you don’t have the high costs of employee benefits like health insurance, or withholding taxes—giving you more money for your bottom line. Hiring an expert contractor can also mean that a job will be done more efficiently, rather than adding it to a less-qualified employee’s duties.
Contractors and outsourcing are especially useful for administrative jobs, short-term projects, or unique tasks that may not warrant a full-time employee. Some services, such as accounting or HR, may be part of a software and service package. If you need a contractor for a specific task, consider looking on a freelancer website, such as Fiverr or Upwork.
Automation
Another way to improve efficiency and reduce costs is by automating processes. A good software or software service can help with everything from payroll to inventory. Properly systematized automation can give you and your employees time to work on tasks that grow your business. Remember: great business owners work ON the business, not IN the business.
Consider automating the following business systems:
- Lead generation
- Appointment scheduling
- Employee scheduling
- Employee benefits
- Background checks
- Payroll processing
- Bookkeeping
“The interesting thing is what we look at in most businesses today, and this is where big business I guess has had this understanding for a long time. It’s the value of the company that we’re looking to build, not necessarily the immediate profit of the business. Small business unfortunately lives with a day-to-day profit mentality rather than what’s the value of the business we’re building?” – Brad Sugars
How else can we get more money in our jeans?
- Review money management
- What is your accounts receivable process?
- Let’s first look at your invoice.
- On the invoice, do you have your payment terms, payment methods and your late payment fee structure?
- Do you offer incentives for early payment or for payment on time?
One of the best ways to achieve a stable cash flow is to offer prepaid retainers or ongoing payment plans for your clients. For example, instead of a one-off consulting contract at $250 per hour for a full day, tweak your offering and give them a discounted 20-hour retainer plan at $200 per hour. While your hourly rate would be less in this case, you’ll be billing for a greater total dollar amount, and locking your client into a longer-term arrangement. At first, this may not seem as lucrative, but it establishes a relationship and keeps the door open for additional work. Maintenance contracts for service-based businesses are another way to create a new revenue stream.
Review Efficiency
Eliminate tasks and activities that don’t add value to the company or customer. Every dollar you save by eliminating the cost of things that don’t add value to your company, or to your customer, drops directly to your bottom line.
How efficient are your employees? How much are you owed in accounts receivable? Questions like this need to be answered immediately, and to do so, you need to automate your business. Create a system for employees to access and add data, keep all information updated and synchronized, and be sure to build in back-office administrative time into your project fees, hourly rates, or ongoing charges. Automation allows your business to run smoothly and will help a scaled-down workforce accomplish more back-office work.
Review your existing and past customers
It’s easier and cheaper to sell to an existing customer than to gain a new one. Take advantage of people who are already in your customer base or lead funnel by offering them additional items or add-ons to a product or service they have already purchased.
One of the best ways to do this is through your email list. You may be thinking you don’t want to send another email to your customers. If this is you, you’re thinking about customer emails all wrong. All emails to customers should be value first, sales second. What could you send your customers that would provide value to their lives? Consider a tip, recommendation, or piece of advice related to your industry. Then, add the sales language after the value.
Carmella has a great blog on digital marketing tactics for 2021 HERE
Raise Prices
This strategy is both a no-brainer and an unpopular option in today’s economic climate. Still, sometimes, to stay in business, you need to increase prices.
Bar none, this is the easiest answer for many small companies, especially those who have been in business for a while. Most businesses set their prices when their business was first launched, and since they were so hungry for business, they set pricing levels on the low side. Over time, the business likely only made nominal increases to pricing every few years, but rarely did the owner ever sit down and fundamentally rethink his or her pricing model. If it’s been over a year, it’s time to look at it again.
To settle on a price, consider:
- How much it costs you to create the product (breakeven on the product)
- How much it costs to deliver it
- Costs to run the business—including administration and employee wages
- Competitor prices
- The last time you raised prices
After reviewing this data, decide on a possible fair price increase. Include any of the pricing data in your business plan so if you choose to review it at a later time, you can. Then, and perhaps most importantly, communicate this increase to customers. Explain why you came to this decision. If there is a way to add value to the product without cutting into the profit, then do that and let customers know they are getting more as well.
Increase Leads
To prepare for a profit-boosting initiative, start by gathering accounting and sales data. This will help you get a clearer picture of where profits are coming from, how many contacts are made with customers each month, and how many customers make actual purchases.
A streamlined way to harvest such information is by using software connected to point-of-sale terminals or cash registers. Next, launch a marketing and advertising push in order to generate new customer leads, encourage existing customers to buy more, and to promote the most profitable products or services in the inventory. Part of this effort should involve a new way of looking at the business model – most entrepreneurs see the future of their companies in terms of products and services that fill a particular market need or niche.
Instead of looking for the ideal items to buy, invest in purchasing the loyalty of the perfect customer. Rather than chasing market share, chase “wallet share” – or more profitable customer-based transactions. No matter what a business sells, it is ultimately the customers – and how many times they spend money – that generate the profits. Invest in attracting and retaining good customers, and the rest will take care of itself. Instead of reinventing the wheel, find out who is buying wheels and make them your steady customers. Then, sell them a premium wheel with a wider profit margin. Finally, ask your customers to bring in their friends so that you can sell them a set of wheels, too.
Lastly, review your personal finances
Are you saving yourself a wage and costing yourself a fortune? If you ever plan to sell your business, paying the CEO (hi, that’s you!) a regular consistent salary or dividends is factored into your purchase price. Leaving millions of dollars in the business, or reinvesting it in the business each year doesn’t create personal wealth.
By working smarter – not harder – through organized systems, cutting edge technology, innovative advertising, and dynamic employee training, the entrepreneur can prepare to put the business into the hands of capable others – which is the next step toward personal freedom.
Book a complimentary profit finding session with the author of this article, Stephanie O’Brien HERE.