Increase Profit Margins Now
Welcome to step 5 of the 5 Steps to Increased Profits framework – focusing on one of the five steps each week. As a review, the five key profit-generating metrics are: Lead Generation, Conversion Rate, Average Dollar Sale, Number of Transactions, and Profit Margins.
I’ve highlighted the five keys in the following equation:
Lead Generation
x
Conversion Rate
=
# Customers
x
Avg. Dollar Sale
x
Avg. # Transactions
=
Revenues
x
Profit Margins
=
Profits
I talked last post about the importance of ensuring you boost your number of transactions, which is another way of measuring customer loyalty – or repeat business. This week we focus on how to increase profit margins – because that IS the bottom line. Who cares how much revenue you’re generating if there is nothing left at the end of the month, you’re just working too hard for nothing.
Profit Margins are critical to your overall profitability. You can have a fast growing or high revenue generating business but without acceptable profit margins, all of your growth efforts will be for nothing. It is critically important that you not only know your overall margins, but you must know them by product or service type.
Why is this so important? Because you want to promote your highest margin products and services whenever you can. These are the game-changers for you. These products and services are the ones that provide the resources to cover your costs and provide you with resources to invest in your business.
There are two primary ways you can improve the Profit Margins in your business – reduce your expenses or raise your prices. Most cringe at the thought of raising prices, especially in fragile markets, but if you have done the hard work of creating a Unique Selling Position and have truly differentiated yourself from your competition, and know your target market extremely well, then raising your prices may be an option – but don’t do it blindly.
It is mainly fear of the unknown that keeps business owners from taking the bold step to increase their margins through a price increase. Know your numbers, your market, your customers. Studies have shown that your loyal customers are not doing business from you because of price alone. Most will understand and appreciate your rationale and will remain strong, loyal customers – that is if you have treated them like they were special and found ways to deliver MORE than they expected of you.
Cutting is costs is often times easier, but not necessarily the right move to make when you are trying to grow your company. Eliminating waste is always good, but often times expense cutting comes in the form of eliminating services, reducing marketing programs designed to grow your business, or reducing staff and degrading your ability to deliver on your promise. Be careful not to impact your operational efficiency and speed of delivery when reducing your expenses. The last thing you want to do is to become a “me too” business simply because of your efforts to cut costs.
Now, with that caution in mind, there are always ways to gain efficiency and reduce the effective cost of your system. Toyota and other large manufacturing companies, are masters at eliminating costs through waste reduction, efficiency gains, reduced work in process inventories and unnecessary movement of people and supplies. If they can do it, so can you. When was the last time you critically evaluated your business operations with an eye towards gaining efficiencies and reducing unnecessary steps on your process? Creating systems for your business is a powerful way to reduce your costs –while at the same time, improving your productivity and customer satisfaction. If you are not familiar with the tools and techniques for doing this, drop me a note and I will direct you to them.
The challenge is to first know your margins, then be purposeful about improving them on a regular and steady basis. The trend for your margins should always be favorable. While this is the last of the 5 Steps, it’s actually the one you should work on first (now she tells me!). Work hard on this last segment of the Business Chassis and you will position yourself for phenomenal growth and incredible profits!