Want to achieve greater profits but not sure where to start? Although profitability is typically the key goal for a business, it’s a lag measure of the many activities and transactions occuring every day.
There are a lot of levers to pull, initiatives to implement and items to manage to achieve greater profits. These measures all have different levels of complexity, effort, and varying levels of impact and return. With all the activity, noise and whirlwind in a business it can be challenging to know what to target.
There are endless metrics that can be measured however there are 7 key profit drivers which, when focused on, can make a profound effect on the bottom line. As we know in business, sales are where profit starts from and is where the first 5 drivers are focused;
The first profit driver to consider is how many leads the business is generating. Leads can come through various means and could be defined differently from business to business. Work out what this number is in your business and drive the key activities that generate these leads. These would include outgoing calls, appointments, quotes amongst others.
2. Conversion Rate
The next driver is the conversion rate from a lead to a customer. Are there some methods, customer profiles or salespeople that always seem to work that need leveraging? On the flipside, are there some products or customers that take up all your time and never seem to convert? Find measures to increase this ratio such as filtering your quotes, increasing follow-ups, analysing your losses and even improving your pitch and presentations.
3. Retention Rate
Of the customers you have, what is your retention rate? Track and manage your service levels and customer satisfaction and understand why customers may stop purchasing from you. Get feedback from your customers – and unhappy customer can be an excellent source of feedback and a small favour or discussion may turn them around.
4. Order Frequency
Next, what is your customer order frequency? Can you set up supply or service agreements or make a point to reach out to them if they haven’t purchased for a while? Also consider if there are more products you can sell to them, or if existing customers have additional departments or branches you could service.
5. Average Sale Value
Finally on sales, understand and work to drive up your average invoice value. Can you set minimum order quantities, price rises or invectives to purchase above a certain value? Are you upselling or can you add more products? If you are going to the effort of fulfilling an order, it doesn’t take much more work to increase its size – and the results are compelling.
6. Gross Profit Margin
Gross profit margin is a very well understood and considered figure – and for good reason. It’s one thing to get the sale however, there needs to be healthy margin on them. Ensure your costings are accurate and your pricing reflects the value you provide. Often the key to profit in a business is its purchasing with costs of sales being the biggest expense of a typical business. Is there endless supplier price increase creeping in that aren’t being passed on or, with sales growing, are you able to renegotiate pricing?
The final, but not least significant, driver of profit is your overheads. Go through line by line and transaction by transaction – see if there is any fat that can be cut. Make sure each line is providing good value and have a budget and cost control process to ensure the business is running as lean and efficiently as possible.
It can be a very powerful to work out your current numbers and engage with the team to build some scenarios - small changes can result in massive improvement. Integrate these drivers into your goals, make the results visible and reward staff for achieving certain milestones – these are the key numbers that will make the difference.
You won’t be able to target and improve these drivers all at once and some may detrimentally affect the others. However, understand the context, go for the low hanging fruit, and watch the gradual improvements. Although profit improvement is an ongoing journey, remember a journey of a thousand miles begins with a single step.