7 Ways to increase Profitability

 

Although owning your own business is about much more than just money, there are times when it’s all about the bottom line.

You can love what you’re doing, make a significant contribution to society, have employees that love you, but if you you’re not making enough to pay the bills and then some, you’re going to be in trouble.

And it’s not all about growing your sales – not too many years ago during the great dot com boom times, there were all sorts of companies that were growing like gangbusters.  They were adding customers, their quarterly revenue growth was incredible…and yet the hidden story was that a lot of them were also losing money hand over fist.

The real measure that’s meaningful is profit – simplistically calculated as Revenue minus Expenses.  here are some ideas for improving profitability.

1.  Increase Leads for new customers: 

Become recognized as an expert in your field.

The best way to do this likely depends on what field you’re in.  If you’re a plumber, maybe you could speak to local homeowner associations on common problems that can be avoided.  Prove you know what you’re doing, add value to the prospects that come to listen to you and the odds of you being the one that gets called when there’s a problem are awfully high.

If you sell credit card processing (like the guys at Leadership Advocates) you could do low cost educational workshops or write white papers / articles on how credit card processing works and what to look for in a vendor.  Who is a prospect more likely to select, the vendor that educated them in a non-threatening and value added way or the guy that comes in and blindly promises ‘big savings’?  (alright they might pick the ‘big savings’ the first time, but you’ve got a good shot at them the second time around when they get screwed!).

2.  Increase Leads for Existing Customers and Contacts:

Create / Refine the ‘Wow’ magic moment.

This is the payoff point that your customers experience that causes them to say “I love that business”.  Of course you have to do a good job on the basic stuff, but there should be something that really stands out.

There’s a Wendy’s nearby that may be the fastest drive-through in the world.  They consistently handle a long line of cars in record time.  I have gone there for lunch just because I knew I could count on them to get me through quickly and get my order right.  The food is fine, but the experience is remarkable and consistent.

If you’re an accountant, including a concise, easy to understand written summary of specific tax tips for next year would make a great impression that people will talk about.

3.  Increase Leads from Past Customers:

Do a survey and offer a trial for a new product.

You legitimately would like to find out what they thought of you or your product / service and as a ‘thank you’ offer them a free trial or a discount on a new product that would also likely interest them.  You already know something about them since they were previously a customer – put that to your advantage.

A great example is the game company that follows up a few months after you buy your game and recommends another game that’s similar at a discounted price.  If you enjoyed the first one, the odds are that you’ll buy the second one and really become a loyal customer.

If you’re a retailer – a great way to build customer loyalty is to ask your customers what they like and want, and then give it to them.  Along the way, you can offer a targeted discount that might help them branch out to buy something new from you.

4.  Improve your Sales Effectiveness / Closing Ratio:

Focus on asking questions.

If you don’t do anything else – focusing your efforts with prospects on asking what they need and what the implications are will have a fantastic positive effect.

Think about the last time you went to the doctor or the dentist?  Odds are they asked you how you were doing, what your symptoms were, what was bothering you and spent a fair amount of time gathering information before prescribing a solution.  How would you feel if they just jumped straight to their highest margin product when you came in the door without asking you anything?

Imagine going to a car dealer that really tried to understand what you wanted in a car, why you thought you wanted a big engine and what was important to you?  Would that be more likely to impress you than the salesman asking what monthly payment you could afford?

5.  Increase the Average Dollar Sale:

Raise your prices.

Okay this one seems a little basic, but the reality is that many small business owners set prices in a very arbitrary way and will often be very nervous about ‘overpricing’ their products or services.

What would happen if you raised your prices by 10%?  Do you know how much volume you would have to lose in order to break even on that decision?  If not, you should figure that out – the answer might surprise you.  As an example, a 10% increase in price might allow you to sell less and still make more profit than you did before.  Without the numbers, there’s no real way to tell for sure.

Finally – this may not be true for you, but for a lot of business owners the biggest thing holding them back on prices is fear.  Can you find a way to experiment with pricing and see the results?  If it doesn’t dramatically affect customer response then you have  a winning proposition on your hands!  Price increases go straight to the bottom line!

6.  Reduce your Variable Costs:

Emphasize higher margin products or services.

This one also seems basic, but it’s likely in your best interests to start looking at your products and services in terms of margin benefits.  If you’re putting a lot of time and effort into selling your low margin products, then you’re climbing the steepest hill.  What if you translated that effort into a high margin product instead?  Relatively you might have lower revenue but that doesn’t matter – the only thing that matters in this game is the profit.

That’s not to say that you push an inappropriate solution on to a customer just because it has a higher margin – that’s a quick way to lose a lot of sales and profits.  Instead think of it as shelf space at the store – put your best products (the ones that have the best margin) at the front of the shelf and make it easy for customers to buy those products.  Changing the mix upwards even a little bit can make a big difference on the bottom line.

7.  Reduce your Fixed Costs:

Aggressively manage your cash flow.

A lot of small business owners have loans, lines of credit or just good old fashioned credit cards that they use to keep things moving.  Unfortunately all of those things come with interest rates – sometimes very high interest rates that can be a real drag on profits.

One way to reduce fixed costs is to reduce borrowing expenses by paying off debt as quickly as possible and maximizing cash flow.  The Fintel analysis tool that I use for Business Analysis uses a process called Net Balance Position to help figure out ways to improve cash flow.  Net Balance Position simplistically is Working Capital Available less Working Capital Required.  Basically it’s how much money on hand do you have minus how much money do you need to pay off all your expenses.  By maximizing this number, you can free up additional cash to pay off loans more quickly.

At a high level, there are only a few ways to improve your cash flow – minimize how much and how long you hold inventory, get paid more quickly by your customers and take more time paying off your expenses (without incurring penalties).  Easier said than done, but there’s a lot of things you can do to make improvements in cash flow.

What are you doing to increase your profits?  Share any stories you might have here.

Shawn Kinkade      www.aspirekc.com

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