When I talk about maximising in relation to profit, I really want to get people thinking about systemising… Growing your business revenue and profit can be tackled with seven systemised steps that I will share with you now. This has been taken from chapter seven of my new book, The Financial Times Guide to Starting a Business…
7 systemised steps for growing profit
Now, the marginal gains philosophy is the concept that breaking down a process into tiny components and improving each one by a small percentage yields significant results. So that’s what we’re doing to your business in this article.
We’re looking at the seven components of revenue and profit, and exploring how they can be improved:
1: Number of Leads
Is your marketing strategy and your chosen tactics actually working? What resources can be improved or introduced to obtain more leads to suit your financial forecast?
2: Conversion Rate
What is your target rate of conversion? Are you making your USP clear in meetings and testing different approaches to convert leads to sales?
3: Number of Sales
Can you make cross-sales, or encourage your customer to buy more frequently? How can you help your customer to purchase more solutions. How can you make your offering more attractive? Perhaps packages/bundles, offers and deals…
4: Value of Sales
Review your pricing policy to ensure you’re charging the right amount – again, consider packaging/bundles to offer different price points and think about how you will retain demand – would you run a sale?
5: Profit Margin
This requires reviewing your supply chain and resource charges to improve margins by reducing costs.
6: Re-Purchase Rate
How do you encourage customers to buy again? Do you have reminders to send out after a set time period, or do you have an attractive subscription model? Maybe you can make an offer for the second or third purchase…
7: Increase Lifetime Value
This is about your relationship with your customers. How and when do you communicate with them? Do you ask for feedback, and do you listen and act on it? How well do you know their wants and demands after they have bought – are you meeting expectations?
Remember: Increasing all areas by 5% does not just return a 5% increase to your bottom line. The cumulative effect provides an all-round greater return on investment.
How to increase gross profit margins
Do you want to increase your profit margin to cover the overheads of your business, or provide a greater return on investment? Either way, let’s get to the point of this chapter – your profit margins can be improved by considering some or all of these seven strategies:
1: Evaluate and Reduce Costs
- Audit your fixed costs and cut any unnecessary expenses you uncover
- Address inefficiencies, streamline operations and automate where you can without compromising service and standards
- Negotiate lower costs with your suppliers.
2: Strategically Raise Prices
- Optimise your prices through careful market research and competitor analysis
- Add value or new features to justify an uplift
- Clarify your unique selling point and values to differentiate you from competitors.
3: Make Improvements
- Focus on your ‘hero’ products and services – the ones that make you more money
- Discontinue or lessen the focus on low-margin products/services
- Increase the average order value by cross or up-selling.
4: Enhance Customer Retention
- Loyalty programmes encourage repeat purchases
- Ensure your customer service standards are the highest they can be
- Communicate the value and ROI your customers get from you
5: Optimise Your Stock Management
- Avoid markdowns by improving stock visibility
- Keep fast-moving items in stock at the right levels
- Reduce excess inventory of slow-moving items.
6: Differentiate Your Brand
- Focus on your USP
- Build brand loyalty through relationship marketing to reduce price sensitivity
- Emphasise and compete on quality and service over prices.
7: Increase Average Order Value
- Encourage larger orders through volume/bulk order discounts
- Bundle and package complementary products
- Set a minimum order value.
Remember: Your gross profit target can allow you to pay your fixed costs/overheads, provide you with the profit return you deserve and allow for an element of free cash for reinvesting into your business.
The price is right – or is it?
I would be doing the topic of profit a disservice if I didn’t mention pricing – and getting it right… Putting the right price to your product or service can be one of the biggest challenges for a start-up owner, so chapter seven of the book goes deeper into this topic. In the meantime though here’s a quick exercise you can work on today:
Draw three columns on a sheet of paper: Service/Product | Benefit | Scope.
Your price can be based on the value to the customer; column two and the scope of the service; column three. Be explicit in the description in each column and look at how you can change the complexity of the service to suit you, and to suit your ideal customer.
Looking at the columns with each product or service laid out like this will help you assess the overall value to your customer and therefore set a reasonable price that you are confident talking about in front of prospects.
As I say, the book goes into this a bit deeper, but for now, just remember that your price does NOT have to meet or beat your competitors…
The FT Guide to Starting a Business is available online and at Waterstones bookshops. If you’d like to discuss any of the considerations raised in this article, please get in touch for a complimentary call, with no obligation.