One of the many ways to increase a business’s profits is to make several small adjustments that add up to a significant increase in overall profits. In the following chart, you can see how a 3% improvement on each factor can translate into an 86% improvement in profits. By increasing the number of leads by 3% and increasing the conversion rate of leads to customers by 3%, you increase the number of customers by 6%. Then when you increase the number of transactions each customer makes by 3% and increase the average sale price by 3%, your total revenue increases by 13%.
|# of Leads||1000||3.0%||1030|
|# of Transactions||50||3.0%||51.5|
|Cost of Sales||1,250,000||50.0%||3.0%||1,364,679||48.5%||9%|
|Business Dev. Costs||125,000||5.00%||3.0%||136,468||4.85%||9%|
Next, by decreasing the Cost of Sales by 3% (50% of Revenue x (1-3%)) to 48.5% of Revenue, Gross Margin has increased by 16%. Business Development costs went up but as a percentage of revenue, it went down by 3% (5% of revenue x (1-3%)) to 4.85% of Revenue. Administration costs went down 3% in dollars.
Taking all of this together, Profits increased 86%, with only a small adjustment to each item impacting profits. The question is then, how do you improve each item by 3%? Before you take any of the following steps, it is wise to prepare financial projections of the impact of your planned actions before taking them. It is even better to have a strategic plan that the financial projections are based on. Here are some suggestions on how to improve each:
Increasing Leads – The key here is to reach prospective customers with something to entice them to take action. What is effective for your business will depend on your target market and what you have to offer. Some examples of lead generators are Search Engine Optimization, Google Ads, advertisements, and networking. Depending on your business, it could mean getting known by providing seminars, giving speeches, writing blogs, Public Relations and social media. The possibilities are endless but what you do should match your strategic plan.
Conversion Rate – This is taking steps to make sure your efforts to gain new customers are paying off more often. Key things to consider here are having a strong unique selling proposition, increasing the sales skill level of your staff, having a high perceived value and never giving up.
Increase the Number of Transactions – This is simply selling more to your customers. Possible ways of doing this are running special events, staying in constant contact with customers to maintain a positive relationship and loyalty programs. You may even offer price inducements to increase frequency but you need to keep in mind that you need to increase the average sale as well.
Increase Average Sale – Here the goal is to increase the average amount that customers spend on each transaction. If you have a unique selling proposition and you position what you sell on its benefits and values, you should be able to charge more than your competition, thus raising prices. Other suggestions are to offer product and service packages, upselling customers to a premium product and cross selling complimentary products or services that customers would want. You could also increase the average order size by offering larger units of purchase.
Lower Cost of Sales – This really comes down to finding ways to lower the cost of products and services provided to customers. The possibilities are endless and will depend on the business you are in. To start with, negotiate better prices with your suppliers, especially when volume increases. Consider contracting Purchasing Experts in areas you don’t have expertise in. For example, an Associate was able to save a manufacturer $75,000 a year by lowering packaging costs. Another Associate helps to increase efficiencies of staff and processes. Some other ways to lower Cost of Sales are to plan properly to lessen down time, ensure quality standards are met to decrease waste, collaborate with suppliers to improve design and operational efficiencies, evaluate the cost and effectiveness of every element of your supply chain and consider outsourcing when others have a greater level of expertise. The list can go on.
Lower Business Development Costs – Remember that this was to lower the cost as a percentage of revenue but not to lower to dollars spent on Business Development. Here you want to make every dollar count and not waste the money you spend. To do this requires you to plan ahead with specific goals that tie to your overall strategic plan. I can help with your strategic plan and my Associates can help with the Marketing and Sales part of the plan. Once you have a plan, it is a good idea to test your campaigns before making a big commitment to it. Once the test is done and the campaign has started, tract the results and make minor adjustments to try to continuously improve results. This is all to make the most of your Business Development dollars. There are several things that you can do to promote yourself that is either free or costs very little but there isn’t room in this article to list them all.
Lower Administration Costs – There are ways to lower Administration expenses while still providing excellent customer services and a good work environment. First of all, don’t assume that your buyers have expertise in negotiating the purchase of all products and services. Our Associates have experts in many administration products and services and it won’t cost you anything if they don’t find any savings. From your strategic plan, you will have a better sense of the activities and the quality of those activities necessary for your business’ competitive advantage. You will then determine what is not necessary or could be outsourced for better efficiencies. Also consider higher employee engagement and recognition to increase their job satisfaction and productivity which helps lower Administration expenses.
As you can, there are many ways to increase profits by making several minor changes. It is important to not to assume that more advertising and slashing expenses is all that is needed to produce higher profits. It is best to look at the big picture by creating and implementing a strategic plan so that the decisions you make fit together as a cohesive whole producing the 86% increase in profits mentioned above. It is also important to get help from those that have the expertise to make this happen and to consider them as an investment that will provide you an excellent return with higher sales, profit and even a business that is worth more when you are ready to exit.
For additional articles and other services I provide, go to Prosperous Business Consulting.
Kevin Ballantyne, BBA, CPA, CA