Many business owners lose sleep grappling with how they can improve their bottom line. Often, the immediate focus is on expenses, but there is a finite limit by which you can cut expenses — to zero, at which point you risk having no business left.
Here are three ways to boost profitability by working the top line (revenue) and then three ways in which you can be savvy with your expenses. Let’s start with the revenue generating ideas.
Top 3 tips to boost profits
1. Increase your prices
I usually start by looking at pricing when assessing a business. The key to gaining the confidence to increase your prices is to understand the dynamics of increasing prices in your business.
Let’s imagine your business runs on a gross profit margin of 45 percent. Did you know that if you discount your prices by 10 percent in order to win more customers, you would need to attract 29 percent more customers before you are any better off?
On the other hand, if you increased your prices by 10 percent, at that level of gross margin you could afford to lose almost one in five of your average customers before you are any worse off. Sounds like a much better option.
Progressively test price increases — perhaps pick one product or service and see what happens. Don’t be surprised if there is no response from customers and the extra profit drops straight to the bottom line.
2. Set targets — and measure and manage them weekly
If your revenue was $1 million last year, what do you think you can achieve this year? Most business owners mentally add 5 or 10 percent if they have had a great year. But most businesses are actually capable of achieving much more than they ever believed possible.
Think about this simple equation:
Customers x transaction frequency x average transaction value = Revenue
Imagine our hypothetical $1 million business had 200 customers buying from them five times a year with an average transaction value of $1,000. What would happen if you could improve each of those key metrics by just 10 percent? You’d now have 1100 customers buying 5.5 times a year at $1,100 per transaction. The result? Revenue of $1.33 million. In other words, by improving each metric by just 10 percent, the compound effect is a 33 percent increase in revenue.
Work the numbers for your business, then set some targets. If you went with the above numbers, you would then have targets to win a few new customers every other week; find ways to get some of your customers to come back just one more time per year; and implement a price increase of 10 percent. But the key is to measure it every week so that you are right on top of the numbers — and then raise the bar when you start to achieve them.
3. Talk to your customers
The best way to find out what customers think of you and what they really want is to ask them. A great way of doing this is by holding a client advisory board. Appoint an independent facilitator and invite between 12 and 15 of your best customers along. Have the facilitator ask questions such as:
- Which products and services do you buy from this business?
- Where is the value you get from using this business’s products and services?
- Do you know anyone else who might benefit from using them?
- What do you think of their prices? (You’ll be surprised — they’ll sometimes say you are cheap!)
- What else would you really like to see this business do for you?
Hold the meeting, then pick the top three revenue ideas and implement them with a laser focus. And — of course — measure the results.
Top 3 tips to manage expenses
Generating revenue and managing expenses are two sides of the same coin. When effected together they are a powerful tool to increase your bottom line. Here are three tips on managing expenses:
1. Review every expense line
Your goal should be to ensure you are getting the very best return on investment for each expense on your profit and loss account. Your MYOB online accounting software will give you an overview at the click of a button that you can then assess together with your team.
Don’t slash costs that are ‘good costs’. For example, you might be paying your accountant a significant fee, but are getting terrific business advice for your investment. Most businesses find there are some costs they could eradicate completely with no detrimental effect on revenue.
2. Review your marketing and advertising costs
Marketing and advertising is very important to grow revenue. But the question to ask again is, what is the return on investment (ROI) that you are achieving on each marketing outlay? If you spend $2,000 on a marketing campaign, for example, and you can track new revenue in year 1 of $5,000, that is good business and you should keep doing it, especially if the lifetime value of a customer is high. (For example, if a customer stays with you for 5 years, now you are looking at $25,000 in revenue.)
But if you drop $1,000 on something — maybe sponsoring the local football club — are you really getting a solid ROI? Could you redirect funds to something else where you would be more confident of getting a return?
3. Review your labour costs
This may polarise my audience, but the reality of the world in which we live is that many jobs can now be performed offshore for a fraction of what you would pay locally. I certainly don’t suggest that you fire your local team, but the next time someone leaves your business, it’s worth considering whether you could replace them overseas.
Many administrative jobs can be done remotely. Some marketing can be done offshore. There is a plentiful market of willing workers, and depending on the type of work involved, you could be looking at between 20 and 40 percent of what you would pay locally in terms of salary outlay. Depending on your business, that could be a massive saving. In my business, we have customer service, marketing and software development people in our offshore offices. We also have local people who tend to be the people who speak to clients, but our offshore team does a terrific job.
If you approach your profitability from both the top line and the bottom line, you’ll increase your profits in no time.