Shhh... The Secret Formula For Increasing Your Profits
When it comes to increasing profits, many business owners focus solely on cutting costs. I wrote about this a couple of weeks ago in my post “4 Ways To Increase Profits – Without Having To Increase Sales.” So whilst of course it’s important to contain expenditure, there are five other ways you can substantially boost your profits - and grow your business. And it’s really simple!
So what are these five easy ways to grow your business and increase profits?
Well, the formula relates to 5 factors, which when increased, if only by a small margin, will lead to an exponential boost both in revenues and profits.
These are the five levers:
- Leads:The total number of people who have contacted or who have been contacted by the business over the course of a year.
- Conversion rate:The percentage of people who actually make a purchase. For example, if 10 people visit a shop and five people buy something, that shop's conversion rate is five out of 10, or 50% that day.
- Average value of a sale:The average amount per sale, estimated over the course of a year.
- Average number of transactions:The number of purchases the average customer will make over the course of a year. Again, this is an estimate.
- Profit margin:The profit percentage of each and every sale. Simply put, if a business sells something for £100, and profit was £40, the profit margin is 40%.
You’ll be familiar with each of them. But how are you going to apply these levers to get an exponential growth in your business and profits?
It’s really simple. So let’s get straight into it.
The formula looks like this:
Leads x Conversion Rate = Customers Customers x Average Value Of Each Sale x Number of Transactions = Revenue Revenue x Profit Margin = Profit
Let’s look at an example to see how this works in practice. This is the maths bit – but you’re going to love it - I promise. 4,000 leads x 50% conversion rate = 2000 Customers 2000 customers x £50 average value of a sale x 2 transactions a year = £200,000 in revenue $200,000 revenue x 40% profit margin= £80,000 Profit
Simply put, if you are running a business that converts one out of every two prospects into paying customers, and those customers make an average of two purchases at £50 each year, and your company enjoys a 40% profit margin on revenues of £200,000.
This means your total profit for the year is £80,000.
That’s a great profit. But what would happen if, over the course of the next year, you improved these results by just 10% across each of the five areas?
Let's do the maths and look at what happens to your bottom line: 4,400 x 55% = 2420 Customers 2420 x £55 x 2.2 = £292,820 Revenue £292,820 x 44% = £128,840.80 Profit
Examine the numbers closely and you'll see the 10% increase is incremental, which means you could easily nudge the numbers up by that amount over a period of months - or even weeks.
How interesting does the bottom line look now? Even though we've increased each lever by just 10%, we’ve boosted profits by a massive 61%, or a total of £48,840.80.
What would you do with an extra £48,840.80 in your business this year?
If you like the sound of an extra 10% in profits, do the maths yourself and see what the numbers look like if you increase each lever by 20%, 30%, 50% or even 100%.
Making just a small adjustment to each lever can have a massive impact on your revenues and profits – and your business growth. And it’s really simple!
So while your competitors are busy cutting expenses to generate higher profits, you have five other factors with which to work. There are lots of strategies you can use to boost each of those levers, both immediately and over time. We'll look at some of those strategies in other blog posts.
For now, work with your numbers and brainstorm different ways to increase leads, to get more customers buying more frequently, to increase the amount they buy and then raise your profit margins. When you do this, you'll be miles ahead of the majority of owners operating businesses today. Better yet, you'll be able to create a bigger marketing budget, or add to your contingency fund or increase your salary.
If you enjoyed this article, you may also like:
- 4 Ways To Increase Profits – Without Having To Increase Sales
- The Power of Momentum In Business
- 7 Actions To Take When Business Is Slow
If you haven’t yet joined our private Plan For Profit community, you can do so here for free.
Question: We’re just about to start Q4. If you applied this formula to your business, what impact would this have on your profits for the final quarter of the year?