This article is Part 2 in Dr Greg Chapman’s ‘Five Profit Drivers’ Five Part Series.…
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Have you ever seen a business that has doubled their sales apparently overnight? Have you wondered what is the one thing they did to achieve that result? The chances are they did a number of things which when multiplied together gave the end result. In all likelihood, they understood and used the Power of Leverage.
Let’s see how that works. Consider this example.
In this example, a business has had 10,000 contacts in a year. This could have been phone enquiries or walk-ins, or it could have been outbound calling. And let’s say that 10 per cent of all contacts have been converted to customers with an average sale value of $500. And on average each customer bought twice in a year. The business’ turnover would be $1,000,000 and with a 25 per cent margin, their gross profit would have been $250,000.
All pretty basic. You will notice in the diagram above, each of the Five Profit Drivers has been marked by an arrow. They are:
- the Number of Enquiries
- the Conversions to Sales
- the Average Value per Sale
- the Number of Times a Customer Buys from You
- the Gross Profit Margin per Sale
Increasing Profit Driver Performance
Each of these profit drivers can be increased. Most would agree, through good marketing strategies, each of the Profit Drivers in the example above could be lifted by 15 per cent without a lot of difficulty. For example, the Number of Enquiries could be lifted to 11,500 without much effort, as could the conversion rate to sales be lifted to 11.5 per cent. We can see here what would happen if all the Profit Drivers could be lifted by 15 per cent.
If each of the Profit Drivers is increased by 15 per cent, this would result in an increase in gross profit of 100 per cent!
This works because each Profit Driver increase is Multiplied not added to each other increase. The implication of this is small increases in each of the Profit Drivers can have a very large impact on your bottom line. In this example, we have assumed a uniform 15 per cent increase in each Profit Driver to achieve a doubling in profit. Now in practice, it is usually easier to get increases in some areas than others, as good results may already being achieved for some of the Profit Drivers.
For example, you might have a conversion rate of enquiries of 80 per cent. Now you could spend time increasing you conversion rate to 90 per cent or even higher, but there is a law of diminishing returns. That is it takes ever more effort to get gains at the high end and you will never attain 100 per cent. In this case, increasing enquiries or your gross margin, may achieve better reward for effort, especially if little time has been spent on these strategies in the business.
Generally businesses know the areas on which they have not focused. Therein lies the potential goldmine of opportunity and I have yet to see a business that has maxed out on every single profit driver.
- Start collecting data for your current Profit Driver Performance.
- For each Profit Driver develop strategies for improvement.
- As you implement these strategies, monitor the impact on each of your Profit Drivers and your Gross Profit.
Dr Greg Chapman is the author of the award winning best seller, The Five Pillars of Guaranteed Business Success. Visit Empower Business Solutions to learn more about marketing your business and a free preview of his book.