Understanding your Profits

It is too simplistic to say that the more customers a business has, the more profitable it will be. If this was the case, then several companies in USA and Europe would not be posting multi billion dollar losses. We all know that profit is simply sales less expenses but below is a more detailed formula for you to consider.

Profit = Total customers x Average sale x Number of Sales p.a. x Gross Profit Margin – Fixed Costs

To increase your profits, you actually have five things to work on. Last month, I looked at a number of ways to increase your total customers. The two most profitable ways of doing this are to minimise those customers who leave your business and develop systems to maximise your conversion rate. The best way to increase your conversion rate is to start with highly qualified leads in the first place.

Most businesses sell multiple goods and services so the average sale is difficult to know. However, it can be calculated by simply adding up all of your transactions for the year and dividing this figure by the number of customers.

The easiest, yet most overlooked method of increasing your sales, is to raise your prices. Often, it is the business owner who has more hang-ups over price than the actual customer. By all means, have fair prices but it is risky to claim to be the cheapest since someone can always come in and sell the same thing or something similar to what you are selling for a lower price.

To increase your average sale, two common methods are cross-selling and up-selling. Cross-selling is the act of selling other products at the same time. The experts at cross-selling are McDonald’s. The young people behind the counter are always trained to ask, “would you like fries with that.” I believe this simple question is worth millions of dollars to McDonald’s.

Up-selling is the act of selling a more expensive item. This could be something as simple as buying a larger sized drink or it could be a major sale such as buying a more expensive house. Almost all businesses have the opportunity to up-sell. The skill is in developing systems to see this happen and hiring the right staff to implement these procedures.

You can use virtually the same strategies to increase your number of sales per annum as you do to minimise the number of customers who leave your business. This has a double-edged effect on profit. It increases your total number of customers and also increases the number of sales per annum. Below are seven ways you can achieve both aims.

1. Give exceptional service.
2. Handle complaints well.
3. Develop a customer loyalty program.
4. Retell your marketing story.
5. Make special offers to your customers.
6. Contact your customers regularly.
7. Use multiple media both for marketing and for sending free information or free gifts.

There are two types of expenses involved in running your business. They are the variable costs and the fixed costs. To increase your gross profit margin, you need to reduce your variable costs. Some of these costs include your manufacturing costs, other costs in purchasing items you sell, order processing costs such as postage and staff to handle the orders and all selling and marketing costs including your sales representatives. Before you can reduce these costs, you need to measure them. Then evaluate how you do all of your procedures, from selling through to order processing and customer service. Almost without exception, there is room for improvement in these areas. In a large number of cases, you can reduce these costs by up to 10%.

Here are a few tips.

  • Stop doing wasteful marketing.
  • Sack unproductive staff.
  • Eliminate duplication.
  • Development better time management skills for all staff.
  • Purchase more efficient capital equipment.
  • Look at the little expenses. E.g. staff amenities, stationery and couriers.
  • Review your major suppliers. E.g. Telephone carriers, insurance companies and banks.

Your fixed costs are generally items that are paid independent of your sales. These include items such as rent, accounting fees and legal fees. It is worthwhile reviewing these suppliers from time to time. You should particularly look at your premises. Are you in the most efficient place you can be? We recently moved premises and welcome the improved efficiencies. You do not want to move on a regular basis so plan ahead, because moving costs are substantial.

Naturally, there are many books written on increasing your profits. By all means seek advice from marketing experts and accountants. To sum things up, there are basically two ways to increase your profits. They are better marketing and better control of your costs.

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