There are three ways to grow your business profits. Most
business owners believe that there are an unlimited number
of ways to grow your business, however; they are incorrect.
There are only three primary ways in which businesses can
grow. Understanding these fundamentals can help business
owners to distinguish what they need to accomplish for
their businesses to not only survive, but to thrive. I
will first go over the three ways and in subsequent
articles I will dive deeper into each one.
The first method is the most common method and that is to
raise your gross sales. This means that you raise the
number of units sold. When you look at traditional
business this is where 90% of all the effort goes into
improving the profits of a business. Not to say that it is
not important, however; it is the least effective return on
investment of the three ways to grow your profits in any
business.
The second and much easier way to grow your business is to
increase the size of the transaction. If your average
ticket price is $2,500, think about the impact on your
bottom line if you can raise that by 20% to $3,000. For
most businesses the fixed costs exceed the variable costs,
so the incremental difference in expense would be very
little, leaving the majority of the gain to go directly to
the bottom line.
The third way, and I personally believe the most important
way to grow your business, is to increase the frequency of
the purchase. For instance if your client currently
purchases from you an average of once per year, let's bump
that up to 1.2 times per year. This is a twenty percent
increase in volume by just increasing the frequency of the
purchase. We will go over in more detail several ways to
affect each of these areas but for now let's take a look at
what the impact is of these changes.
For simplicity sake we will take a service company that is
generating $1,000,000 in gross sales, their fixed overhead
at this volume is $400,000 which covers real estate,
administration, advertising and general operating expenses.
The variable expenses are $350,000 which covers sales
commissions, allowances, returns, costs of goods, etc.
This leaves the company with a $250,000 pre tax profit. Or
a 25% net income after all expenses.
Taking our example above we are going to increase each area
by 20%. Gross sales from above will go from $1,000,000 to
$1,200,000 which represents 480 units sold at $2,500
average. The average ticket price we will increase by 20%
which changes that from $2,500 to $3,000. With 480 sales
at $3,000 per sale now our gross sales are at $1,440,000.
The frequency was the average client purchasing once per
year, we are going to increase that by 20% to an average
1.2 times per year which increases our gross annual sales
to $1,728,000.
Let's take a look at the impact increasing these three
areas has on the businesses bottom line. In this example I
am using a business, however; this directly applies to
commission sales people as well. We have fixed overhead of
$400,000, the increase in the sales will more than likely
only have a very small affect on these fixed costs for most
businesses, however; let's say that a few more admin people
are needed and possibly a larger facility was required so
let's move fixed costs up by 25% to $500,000. Our variable
costs were at $350,000 or 35% of gross sales, these should
stay the same as a percentage or if anything decreases as
larger efficiencies of scale start to occur. Let's leave
the variable costs the same as a percentage of sales volume
and we will use 35%. Our fixed costs now are $500,000 and
our variable costs are $604,800 or 35% of $1,728,000.
This leaves us with a net profit of $623,200 instead of
$250,000; that's a 250% or two and a half times increase in
net profit to the businesses bottom line! That is the
power of a simple increase of twenty percent in all three
areas, it's exponential to the bottom line and every
business has room to do it.
----------------------------------------------------
Brandt Stohr is a marketing consultant that helps his
clients make quantum leaps in their business. For more
information and some free marketing video's visit his site
at:
http://www.socialmarketing explosion.com
or to inquire about consulting 1-866-490-1919
http://www.brandtstohr.com
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