Do you know what’s driving your profit? If you have no idea about your key profit drivers, increasing your profit points and growing your business are simply out of the equation.
And we are talking about business growth in this article. Growing your business is relative to increasing your profit. You can quickly accelerate your profit and grow your business if you know the spot to apply pressure points that multiplies profitable effect.
Maintaining your profit performance and growing it over time is about understanding your business profit model and creating a smart profit strategy. Sadly, not all small business owners have developed profit strategy. The worst part is that most startup business owners are not even prepared for the constant market change.
Why should you care about profit drivers?
You should realize as early as possible that it is not always peak sale season and you should have alternatives where to gain profit for your business to keep going. And when the market behavior changes, you cannot simply wait for the next high season and let your cash flow run dry while waiting.
There are other factors of change that can be out of your control such as tax policies, oil price hikes, rent increase, and many other changes.
The questions are, are you prepared for these changes and which of the profit drivers should you focus on when these changes occur? Making intelligent decisions comes from the power of knowledge about your business and where your profit comes from.
4 common key profit drivers you should know
There are four key profit drivers known to most entrepreneurs: price, variable cost, fixed cost, and sales volume.
Pricing. Price has the highest impact to your profit. Every cents and dollar increase counts as your profit. But many entrepreneurs pay little attention to this element wrapped up in the belief that competitive pressure gives you little control over your pricing.
It’s reasonable to worry about losing customers the moment you increase your pricing and there is a good chance that your customers will change lanes to your competitor. But here’s a better reflection from Biz Coach Org:
"How many customers could I lose and still make the same amount of profit?"
This idea suggests that you could increase your price by 10% and you could lose a good 25% of your customers, but you could actually make more profit. If losing a quarter of your customers could give you greater profit and lose a significant amount of stress from price-sensitive customers, guess which is the better option for you? And before you ask it — yes, it is one of the best things to happen to you if you get to the point of courage to choose your customers. That is, good paying customers are always good for business.
Choose quality over quantity, every time.
If your business objective is to grow your business, maximize your profit by aggressively pricing your products or services and deliver excellent customer service where you aim to keep customers who chooses the quality of what you offer. The bottom line is about how much profit you gain and not how much revenue, that can grow your business. And keeping price-sensitive customers mostly drains your profit.
Costs. Your return on investment (ROI) is what determines your profit and that is determined by your cash inflow (income) and cash outflow (cost). Controlling your cost structures increases your chances of greater profitability based on studies.
Reducing your costs is an easier profit driver than increasing your price. It may not be much but it is worthwhile to explore. There are two different types of costs: variable cost and fixed cost.
Variable costs are the costs incurred in your business operations, which varies depending on your production volume. It increases if your production volume increases and decreases when production volume decreases. Reducing your variable cost could increase your profit margin.
Fixed costs are your overhead costs such as rent that remains constant whether you increase or decrease your productivity. You may sell 1000 items or 500 items in your shop, but your shop rental remains constant.
Sales Volume. This is the least of all profit drivers. You can increase your revenue and your profit margin remains small if your cost is high. Yet, this profit driver remains the most popular. Many entrepreneurs, particularly the startups are too focused on increasing sales volume than any other profit drivers.
This is not to say you should ignore your sales volume. But you should know that your sales volume consists of three key elements:
Quantity of customers
Average quantity of transactions per customer
Average value per transaction
You can improve your sales turnover by improving the performance of the key elements such as increasing your number of customers, increasing the average quantity of transactions per customer which means selling more often, and increasing the average value or amount of every transaction.
Other key profit drivers you should not ignore
There are other key profit drivers that not many business owners explore but these are elements you should not ignore to help you maximize your profit and grow your business.
Sales Funnel. Develop a strategic sales funnel and increase your leads. The quantity of quality leads passing through your sales funnel is critical to your profit strategy to grow your business.
Strategic Conversion. The quantity of your leads renders it meaningless if they don’t convert. Improve your conversion strategies and increase actual conversion rates that brings profit.
Up-selling and Cross-selling. This profit driver increases your average transactional value or amount of purchase per transaction that helps increase your profit. And it actually works for many big businesses, particularly popular food chains.
Customer Retention Program. Acquiring new customers can cost you six times more than repeating business with your existing customers. Develop strategies to increase the percentage of customers you retain to engage in repeat business.
Frequency of Repeat Purchase. Encourage customers to buy more often and that will kick your profits to soar. Increase your customer purchase from once every five weeks to once every four weeks that will give you 30% more in profit.
Long-term Customer Relationship. Keep long-term business relationships with your customers and you cut the cost of customer acquisition that brings in more profit to your business.
Customer Referral. Referral strategies convert better than cold leads and it costs less. Gaining recommendations from your loyal customers can bring you more loyal customers and that could increase your conversion rate and profit.
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