Profit Levers and how they work

I spoke about business direction and company culture and how they set the tone and vision for your business. I highlighted, that in effect, a plan that isn’t written down, or that isn’t lived and breathed throughout the company and by the people within it, is basically a wish. However, having a plan is great, but I don’t see any business owners being able to retire, go on holiday or pay their team with a culture statement alone, you need so many more parts to have a successful and more importantly, a profitable business.

So, I want to talk about profit and how you can affect it.  Increasing profit doesn’t come from one activity or element alone. Generally, it’s about making micro-adjustments across a spectrum of areas that will produce the most significant results. Undoubtedly, what actions you might take, may vary from business to business or store to store, but there are some consistent levers that appear in most that can be boosted to increase your profits. So, let’s have a look at what they are and more importantly, what you could do to affect them.

It would be simple to just say, “let’s get more customers.” And whilst that may be your ‘silver bullet,’ typically, life isn’t that simple. Quite often, just getting more customers isn’t the most efficient way to grow your business. That said, I’ll be looking at the importance of ‘primary marketing’ in another blog, as it’s such a massive topic.

One potential option could be to talk to the people that you have already engaged with. There’s normally a wealth of ‘untapped’ revenue from these customers that have been forgotten about. Think about it. These customers have already decided that they like you and have brought from you once. How can you re-engage with them and get them to buy from you again. If you can do this, it will have the effect of increasing their lifetime value. Talking of engagement, however, even before someone becomes a customer, they need to be converted. You’ve spent money on marketing in its various guises. How do you treat the enquiries that you get? What’s your conversion rate? What could you do to increase it and turn more of your enquiries into sales?

Once you’ve converted someone to a customer, customer lifetime value generally is where the serious potential profit lies. In many businesses, the cost of customer acquisition means that the first sale may have a low margin or even be loss making. The key, however, is how can you keep re-engaging with the customer and therefore earning additional profit after the initial sale. Thinking about your customers’ needs and offering them a solution is key, it shows them that they’re important to you and helps keep orders coming.

You could look at diversifying your range of products or services. When, thinking about growing your profit, it’s worth asking “what else do my customers have a need for, and perhaps even buy at a similar time to when they buy from us?” By taking a deeper dive and looking in detail at your core customers and identifying where additional needs can be met by your business, you can really open a wide range of opportunities for additional profit. Not only could you diversify your products, but could you diversify your customers too? Who else could or would buy from you? All food for thought but in principle I’m suggesting that you assess how many enquiries and leads do you convert to customers and then how can you get them to buy from you more often and what additional products or services could you sell them?

To discount or not to discount. Now that’s the question!

In simple terms there are times when its right for you as a business owner and times when it’s not but whatever you do, you need to be aware of what the effect is, so let’s look at that.

If you are a business that generates 10% gross profit, and you decide that you want to discount your products by 5% you would in-fact need to be 100% busier to just stand still! 

On the flip side, if that same business increased their prices by 2%, it could afford to lose 17% of their customers and still deliver the same profit. I am not saying, “Hey everyone, let’s put up our prices” but, stop and think if discounting is really what you want to be doing and the effect it has on bottom line! Cash in the bank might be King, but at what long-term cost. 

Coupled at looking at what else you could sell, and who else you could sell it to,  look at what’s not delivering for you that you could stop. Do you have a detailed breakdown of where your sales and profits are really coming from or is it just one big melting pot? Getting into that detail and understanding your key components maybe key to making better or improved business decisions. By trimming the stragglers and really knowing what is working, you can get rid of the poor performers and focus on the elements of your business that are working.

Costs!! That word that sends us as business owners into a dizzy spin and seem to increase at every turn. There are two basic types of cost, fixed and variable. 

Variable costs can fluctuate as these generally relate to items or products sold, and may be associated with stock or the costs to fulfil a service. What can you do to control or influence these? What processes or systems are in place such as PO’s or par stocks to help prevent discrepancies or over ordering? How can you reduce wastage or shrinkage or control your staff costs? What processes or systems could you implement to reduce inefficiencies or inconsistencies? Is there an opportunity to renegotiate terms with your suppliers? How could productivity be increased? Have you run a time and motion study to really see how people in the business spend their time? There is an adage that says, “What gets measured, gets improved” What could you measure or improve?

Fixed costs are those that don’t fluctuate but remain static no matter how busy you are. Perhaps, rent, insurance, accountancy fees, utilities. What could you do to influence these? Are you still in contract? Could you swap or negotiate a better rate, change accountant? Consider though what you consider a cost and what you consider an investment. Is marketing a cost or is it an investment? Is it an investment cost that will deliver us a return and grow opportunity? To know, you need to measure how successful its being for you. If an advert’s working for you and producing results, it’s an investment. However, if not, it may be worth cutting it and re-directing those funds elsewhere. Looking at and reducing costs can seem like an easy win and sometimes it is, however, as with everything, the answer lies in the detail and knowledge.

Great! As a business owner you’re now thinking, “Thanks Emma, you have just asked me to do quite a lot of things on top of the ‘day job’. Well, the short answer is, yes. You could of course do nothing or perhaps even look at a couple of the ideas that I’ve spoken about and certainly something would be better than nothing. However, if you really started to look at those levers and put some numbers behind them you would be amazed at the compound effect they would have on your business, some truly epic percentages and in the current climate certainly not to be sniffed at.

So, my top tips for improving your profit are.

  • What can you do to convert more leads to customers?
  • What can you do to reengage with your previous customers?
  • What else could you sell, or who else could you sell to? Have you truly looked at your customer base and your product categories and identified your opportunities?
  • What’s your customers average transaction value and lifetime value? How could you increase this? 
  • Know when and why you might discount and remember how that can affect profits.
  • Know and measure the value of your customers spend/ sales and the profit it produces in each area or service.
  • Cut the stragglers!
  • Is it a cost you can cut or is it an investment cost, make sure you are clear on what your money is being spent on and why and what return it giving you?

If you would like to understand more about the profit levers in your own business and how you can affect them, please contact me by email 

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