5 Ways to Grow your Profits
13th October 2009
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Simple Formula for succeeding in Business. I like to call this the 5 ways as there are only 5 ways to increase the profitability of a business and if you use this as your focus then you will not go far wrong.
Leads x Conversion = Customers x No of Trans Actions x £AvG Spend = Turnover x Margins = Profit.
Leads are the people who show an interest in buying from you, such as people walking in the door, people asking for quotes or asking from a brochure or price list. Conversion rate is the number of people as a percentage who decide to actually buy from you. The number of transaction is the average number of times in a year that someone buys from you and then how much they spend. Say I was a ladies hairdresser the average Client spends £35 and visits every 6-8 weeks so on average say 7 times per year. The margin is the % profit I make after all costs fixed and variable are taken into account.
Interestingly Customers, Turnover and Profit we cannot control as they are products of something else eg. Number of leads x Conversion Rate is equal to the number of Customers.
With numbers this time to show you how simple but power this formula really is.
4000 Leads x 25% Conversion Rate = 1000 Customers x buying 2 times per annum x £100 average spend = £200k x 25% margin = £50k
Lets imagine for a second that I could increase each area by 10% what effect would that have on the bottom line.
4400 Leads x 27.5% Conversion = 1210 Customers x buying 2.2 times per annum x £110 avg. spend = £292,820 x 27.5% = £80525.50.
Wow, that’s an amazing 61% increase in profits, what would you do with that amount of money in your business ?
So what if I was to really focus my efforts on improving the bottom line profits where would start?
The easiest place I have found to start is with average spend, looking at your prices, stop discounting and charge what it is worth, increase your prices. Shock horror I cannot do that.
If I am selling something for £100, that costs me £70 to make. Then on each sale I make £30. If I have a daily earnings target of £300 I must sell 10 units per day.
Sales are not good so I decide to offer a 10% discount. Cost to make is still £70, so I make £20 on each unit sold.
So to achieve my daily target of £300 I must now sell 15 units, that’s a 50% increase in my sales volume as a result.
What if I put my price up by 10%, so I am now charging £110, still costs £70 to make, I am now making £40 per unit sold.
With the same target of £300, I now need to sell only 7.5 units. So I can see a 25% down turn in business and still make the same amount of money. Ask yourself when was the last time I put my price up and will it take a 10% increase.
The next place I would start is looking at the conversion rate, do some sales training, treat your prospects better, look at your best sales person and replicate this across the team, get an expert to look at your sales process. Get some testimonials on your Best of page. Get your marketing material to focus on the benefits not the features of the products. Our central locking on this car saves you time and prevents your Passengers standing in the rain while you clamber across the seats to open their door from the inside.
Next what are you doing to get Customers to keep coming back, how are you keeping in touch with them, do you send them offers and incentives to come back soon. Who has ever received a voucher from Tesco saying come back within the next 21 days to save 5p off a litre of fuel. Or when you are leaving the hairdresser they get you to book your next appointment straight after you have just had your hair done.
Then I would look at your margins review you costs, stop wasting on money on marketing that is not working, ask your Customers where they heard about you then advertise where your target audience are. Stock goods with better margins that are not generally available so Customers are not so price sensitive, how many times have you seen on wine list at a restaurant a bottle of wine for £10 that you know is on offer at £3.99 in Tesco.
Finally look at your marketing to improve your leads, I put this one last because I want you to be good at Customer Care, have a good profit margin on the goods you are selling and be prepared to ensure that the Customer comes back time and time again. When a new restaurant launches and there is lots of press, they fill the restaurant before they have mastered what they are doing and all they do is disappoint their Customers and negative press quickly circulates making it difficult to ramp up quickly.

For more information contact me, Donald Melrose on 01792 580462 or email donaldmelrose@actioncoach.com

 At ActionCOACH we have over 350 strategies that we use to grow your business in each of these areas. I really want to help business succeed in South Wales so we have put a whole load of free stuff, calculators, ebooks, Videos, Audio clips just visit www.actioncoach.com/free-business-tools.php or give me a call on 01792 580462 and I will happily give you a hour of my time to help you get on in business.


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