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This is not advice. Items herein are general comments only and do not constitute or convey advice per se. The information contained in these articles is for guidance only and should not be relied upon without obtaining professional advice having regard to your direct circumstances.

 

Greatest secret in the business world

Most business owners struggle for years chasing higher profits. Most fail. And they do so because they are relentlessly trying to make their bottom-line grow by focusing on upping sales or cutting expenses.

After all, those are the only factors you can work, right? What if I told you there are many paths to bigger profits? And showed you a way to drastically increase your bottom line by working any one – or all of them?

You see, most of the owners coached by my team or me are so stuck on getting more customers, more revenues or more profits, they miss seeing a much bigger picture. They don’t realise all three of those numbers are the result of five other factors...

And when you know all five, you can multiply your bottom line. Would you be a little more excited about your business every Monday if you knew your profits were “multiplying”?

Well, in today’s column, I’m going to guide you through what I call the “Five Ways” – the formula for profit that I believe is responsible for more business growth than any other “secret” I know. Best of all, it works for any business, even yours.

How? By remembering that profits, revenues and the number of customers are all the result – an end score. And just like baking a cake, unless you change the ingredients, the results stay the same.

The “Five Ways” focuses on the following five factors that drive profit in any business – and these five alone: Lead Generation; Conversion Rate; Average Dollar Sale; Average Number of Transactions and Profit Margins. Those are the same five factors highlighted in our “Five Ways” illustration above.

Increase one – or any – of these factors and you start multiplying your profits. Let’s work through each factor one-by-one.

Leads: The first factor in the “Five Ways” is leads. So what’s a lead? It’s simply the total number of potential buyers a business has contacted – or that contacted the business – over the course of a year. Leads are also known as “potentials” or “prospects”.

Conversion rate: This is the percentage of people that actually bought. If ten people walk through a store and three people buy, that store’s conversion rate is three out of ten, or 30 per cent.

Number of customers: This is the number of total customers, and is determined by multiplying the total number of leads by conversion rate.

Average dollar sale: This is the average dollar sale amount per sale – estimated over the course of a year.

Average number of transactions: This is the number of purchases the average customer will make over the course of a year.

Revenue: This is the total amount of overall sales for a business

Profit margin: This is the profit percentage of each and every sale. Simply put, if a business sells something for $100, and profit was $25, the profit margin is 25 per cent.

What does this all look like? Let’s run some numbers.

Let’s say your company has determined the following: It has 4000 leads and a conversion rate of 25 per cent equals 1000 customers. There are two transactions per customer with an average sale of $100. Your revenue therefore is $200,000. Let’s assume a profit margin of 25 per cent, so profits are $50,000.

Over the next year, let’s aim at an increase of just 10 per cent in each of the five areas. Now, many companies will be able to do bigger numbers, and most of the companies we coach achieve far greater increases over a year. But let’s just aim at some simple things to work in each area.

Watch what happens to your bottom line: Number of leads 4400, with a conversion rate of 27.5 per cent, equals 1210 customers. Let’s assume there are 2.2 transactions on average with an average sale of $110. Revenue therefore rises to $292,820. Let’s also assume a bigger profit margin of 27.5 per cent. Profits rise to $80,525.50.

Interesting, isn’t it? The $30,525.50 increase in profit ($80,525.50 - $50,000) in percentage terms equates to a 61 per cent boost in the bottom line ($30,525.50/$50,000). Phenomenal leverage. Remember, we are multiplying, not just adding. And if you think 10 per cent is impressive, run your own numbers or the same numbers with a 20 per cent increase and it will start to blow you away.

A free resource

If you want to run a variety of numbers of your own, we’ve developed an interactive “Five Ways” calculator at the following link: actioncoach.com/free-business-calculator-profit.php

It’s simple, it’s free, and it’s designed to give you an idea of how powerful the “Five Ways” can be.

Hopefully, this great “secret” will guide you to greater profits, and also show you how powerful knowledge can be for your business.

By Brad Sugars
MyBusiness magazine, August 2008

 


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