In business there are no magic bullets, but this idea is so powerful it certainly feels like magic.
I ran into an old friend yesterday, and it reminded me of a series of seminars I ran a few years ago that contained a section on how to increase profits.
Especially when times are tough, it's great to be able to break things down into some simple rules that allow you to know where to focus, so
I'll share this very simple but powerful idea with you now.
Gross Profit is calculated on an "averaged basis" as:
(Total number of clients x Average number of visits per year x Average sale x Average margin)
Let's say I have a small grocery store (simplified numbers for effect) with 200 clients who visit once a month. On average they spend $100 and I have a 15% margin on the items sold.
From the above example ...
Gross profit per year = 200 * 12 * $100 * 15% =
$36k
Now if I asked you to double your profits this year, you might look at me sideways and say that it's not possible. That's because many people think that to double your profits you need to double your sales ... It seems obvious from the calculation above?
But the truth is that the compounding effect of changes in each of these numbers, even small ones, can have a dramatic impact on the bottom line.
So if we are going to double our profits, we could do it like this...
Grow the number of customers by 20%
There are lots of ways to find new clients. In my case we start talking to our clients and ask them to "bring along a friend". Basically I encourage word of month promotion and 1 in 5 bring a new regular client?
Now I have 240 clients.
Get them to come back more often
When we review our sales statistics we find that people are buying once a month. Due to our sales cycle we have people buying on the same day (eg 15th) each month. By changing it to a 4 week cycle we could get one more sale per year.
Now our customers are purchasing 13 times a year.
Spend more each time (15%)
Our sales promotion now focuses on getting a little more in each shopping basket. We look at impulse purchases and slightly higher priced options. For example one pot of premium honey a month over winter purchased for its medicinal benefits would provide the required $15 increase.
Now the average sale is $115.
Increase margin to 20%
This might look after itself, as the higher value options also have a higher margin. However we look at our purchasing and got an improved margin by buying in greater bulk, twisting suppliers' arms and reducing shipping and breakage costs.
Now my numbers look like
New Gross Profit = 240 * 13 * $115 * 20% =
$72k
Profit Doubled
Ok, Ok ... I know this is over simplified, but I hope you can see that if you focus in these areas of your business, due to the compounding effect, a small increase in each can yield incredible improvements to the bottom line.
The key to guaranteed success is to 'Keep it Simple' and focus on the cumulative effect of continuous improvement.
Your thoughts? Have you seen this work in your business? Am I talking crap ... let me know below!
In business there are no magic bullets, but this idea is so powerful it certainly feels like magic.
I ran into an old friend yesterday, and it reminded me of a series of seminars I ran a few years ago that contained a section on how to increase profits.
Especially when times are tough, it's great to be able to break things down into some simple rules that allow you to know where to focus, so I'll share this very simple but powerful idea with you now.
Gross Profit is calculated on an "averaged basis" as:
(Total number of clients x Average number of visits per year x Average sale x Average margin)
Let's say I have a small grocery store (simplified numbers for effect) with 200 clients who visit once a month. On average they spend $100 and I have a 15% margin on the items sold.
From the above example ... Gross profit per year = 200 * 12 * $100 * 15% = $36k
Now if I asked you to double your profits this year, you might look at me sideways and say that it's not possible. That's because many people think that to double your profits you need to double your sales ... It seems obvious from the calculation above?
But the truth is that the compounding effect of changes in each of these numbers, even small ones, can have a dramatic impact on the bottom line.
So if we are going to double our profits, we could do it like this...
Grow the number of customers by 20%
There are lots of ways to find new clients. In my case we start talking to our clients and ask them to "bring along a friend". Basically I encourage word of month promotion and 1 in 5 bring a new regular client? Now I have 240 clients.
Get them to come back more often
When we review our sales statistics we find that people are buying once a month. Due to our sales cycle we have people buying on the same day (eg 15th) each month. By changing it to a 4 week cycle we could get one more sale per year. Now our customers are purchasing 13 times a year.
Spend more each time (15%)
Our sales promotion now focuses on getting a little more in each shopping basket. We look at impulse purchases and slightly higher priced options. For example one pot of premium honey a month over winter purchased for its medicinal benefits would provide the required $15 increase. Now the average sale is $115.
Increase margin to 20%
This might look after itself, as the higher value options also have a higher margin. However we look at our purchasing and got an improved margin by buying in greater bulk, twisting suppliers' arms and reducing shipping and breakage costs.
Now my numbers look like
New Gross Profit = 240 * 13 * $115 * 20% = $72k
Profit Doubled
Ok, Ok ... I know this is over simplified, but I hope you can see that if you focus in these areas of your business, due to the compounding effect, a small increase in each can yield incredible improvements to the bottom line.
The key to guaranteed success is to 'Keep it Simple' and focus on the cumulative effect of continuous improvement.
Your thoughts? Have you seen this work in your business? Am I talking crap ... let me know below!