Back to Basics: Profit

By Howard Tighe

Some little changes to the way you work can have big changes in how much you make...

It's the reason you get up early in the morning..... and it's the reason you stay up late at night. Profit. Making a profit isn't vulgar, it's essential. We all know there's no magic formula for increasing profitability. There is, however, a step-by-step path to follow to grow your business.

What drives profit and how can you influence them?

Firstly, there are factors which affect your profitability which you can't control – things like the economy, fuel prices and legislation. Forget them. Put them out of your mind. They affect your competitors too. Why lose sleep over things you can't change? Work on the things you can change right now.

Let's look at it in a different way. There are 4 ways you can increase the profitability of your business...

Increase the number of customers you serve

How do you get more business? That's the million dollar question! Increasing your marketing spend usually brings in more custom. That might be a direct mail campaign, or a targeted leaflet drop. There are other ways too. Maybe it's a being proactive and asking your existing customers if they can refer a friend.

Increase the number of times each customer comes back

If your average customer comes back four times a year, how do you increase that to five? A great example would be a restaurant customer of ours who staples a “50% off your next meal if you come back during next week” voucher to their receipt. Think about it. That customer probably wouldn't return quite as soon, but with a half price meal on offer, could they be persuaded? What incentive could you give your customers to bring them back sooner?

Increase the average value of each sale

The simplest way to do this would be to put up your prices, but this isn't always possible. Instead, think about up-sell opportunities. “Would you like fries with that?” – a classic McDonalds up-sell. Better still – ask an open question – "would you like a 2 pack of batteries with that, or a special value 4 pack?" How could they refuse an offer like that? What could you do to get a little more from each transaction?

Increase the effectiveness of your operations

Remember the bright spark at Swan Vesta matches who questioned why they needed sandpaper on both edges of the box? Eliminating one strip saved them a fortune, without adversely impacting on their product. Where are you wasting money? Where are you spending more than you need to?

A modest increase in each of the above areas – a few more customers, a few more visits per customer, a little bit more per transaction and a couple of changes to your operations – can result in a dramatic increase in the profitability of your business.

There are 4 things which affect the profitability of your business. You have control over all of them...

The prices you charge for your products or services;
The quantity you sell or the number of hours you bill;
The variable costs you incur (i.e. costs that increase or decrease as your sales increase or decrease);
The fixed costs you incur (i.e. costs – or overheads – which don't change, even if you sell nothing.)

To make more money, you just need to increase your prices, increase your volume and decrease your costs. Simple. Ha!