One of my favorite quotes is by the author of Rich Dad, Poor Dad, Robert Kiyosaki. He said:
“It’s not how much you make. It’s how much you keep that matters.”
In my experience, a lot of business owners focus way too much on the ‘making’ part (sales) and not enough on the ‘keeping’ part (profit).
Profit gives you cash and without cash, of course, you are out of business.
So, because of this, everything you do in business needs to work towards getting more profit.
Peter Drucker (a famous business consultant) said “What gets measured, gets managed.”
Put another way: What gets tracked, gets done.
So, if you want to grow the profit of your business you need to start tracking some key numbers. This post contains ten tips for growing your profit. Each tip has key numbers that you need to start tracking in order to grow your business.
Tip #1: Don’t just measure sales. Measure sales activities.
We know that it is very important to track certain numbers in your business because what gets tracked, gets done.
Even though most businesses are tracking sales many of them are not tracking all of the ‘activities’ that lead to a sale.
If you want your employees to focus on generating sales you need to start tracking all of the activities that lead to a sale. That way, the employees will be held accountable for these very important activities.
Examples of ‘sales activities’ could be prospect appointments scheduled, calls that are made, emails sent, or advertising campaigns deployed.
Let’s say that a Heating & Air company knows that it takes, on average, ten in-person appointments to land one sale. The activity that the owner needs to track is the number of in-person appointments.
That way, the owner of the company will (a) ensure that the appointments get made because the employees are held accountable and (b) make it a goal to improve on that number every month.
Remember, everything you do in business needs to lead to more profit. Tracking all activities that lead to a sale is very important because more sales, of course, helps with making more profit.
Tip #2: Increase the Average Order Value
You spend a considerable amount of time and money getting potential customers.
Once you have gotten to the point where a customer chooses to spend money with you one of the best ways to increase profit is to increase how much they spend with you – this is the average order value.
If the average person typically spends $50 with you how can you get them to spend $60 or even $100 with you?
A restaurant does this with appetizers, drinks, and desserts. Clothing stores do this with up selling accessories. Disney does this by dramatically lowering the price of a 2-day ticket versus a 1-day ticket. They want you to spend more time at the parks to get a higher ‘order value’ from you.
For example, a retail store selling bicycles, could increase the average order value by selling a warranty program, helmets, and other bike related clothing gear.
Tip #3: Increase your Conversion Rate
Imagine you have 100 people walk into your business and you make 1 sale. A lot of businesses place all their focus on that 1 sale.
But what about the other 99 people?
Why didn’t they buy? Were they even qualified customers? Was there something you could have done to get them to buy? Will they be back?
You are spending a lot of money getting a potential customer to your business. You need to do everything you can to increase the amount of potential customers who convert into paying customers. This is called your conversion rate.
For example, our bike store noticed that a lot of customers came into the store and left feeling overwhelmed by all of the selection.
One way this bike store could increase their conversion rate is by adding knowledgeable and friendly employees to the sales floor and give each and every customer individualized attention.
They could also offer in-store discounts or capture the potential customer’s contact information and then either email or mail them promotional materials to get them to come back to the store.
Tip #4: Increase the Lifetime Value of a Customer
One of the best ways to increase the profit of your business is to focus on the customers that you have already won over – your existing customers.
You could dramatically increase the profit of your business without getting one single new customer.
The way to do this is to increase the “Lifetime Value of a Customer”. This is a metric that tells you how much one customer will spend with you over a lifetime.
A great example of this is Starbucks. They have a loyalty card program that encourages repeat customers by incentivizing them with free drinks. The more money you spend with them them more free drinks you get.
Our Heating & Air business could increase the lifetime value of a customer by mailing out maintenance reminders to existing customers and also by mailing out ‘tune-up’ notices so that customers can ensure that their heating or air system is ready for the change in weather.
Tip #5: Increase the amount of referrals & reviews
People buy from those they know, like, and trust.
People trust their friends. People naturally distrust the person trying to sell to them.
Amazon knows this. One of the reasons why Amazon is so popular is because they feature thousands of reviews on their site for their products.
They know that people will trust a fellow shopper more than they will trust the merchant.
Because of this it is important to increase the amount of referrals and reviews that you get from your existing customers.
Tip #6: Decrease product/service costs
As you know, the profit margin is the difference between what the customer pays and how much it cost you to provide the product or service to the customer.
There are two ways to increase your profit margin: Increase prices and/or decrease your costs.
The easiest way to increase the profit margin is to reduce the cost incurred when providing your product or service to the customer.
There are two main ways to do this:
Way #1: Shop around for the lowest prices. In many cases a supplier will steadily increase your costs every year. By shopping around to different suppliers you may be able to get lower prices or, at least, get your current supplier to give you a discount.
Way #2: Treat inventory like cash. One way to reduce expenses is controlling inventory. Many business owners, and a lot of their employees, do not realize that inventory sitting on the shelf is cash. Cash was used to purchase the inventory and until someone purchases the inventory it is as if you are keeping your cash in piles on the shelf rather than in the bank.
It is very important to (a) only purchase what you need and (b) explain to your employees to not waste it, damage it, or break it once it’s on the shelf.
Tip #7: Increase prices
You can only decrease your product or service costs so much. However, to increase the profit margin per sale you can always raise prices.
This is low hanging fruit for many business owners because they have not raised prices in a while for fear of losing customers.
Here are three rules of thumb to know if you should raise prices?
Rule of thumb #1: Are your current prices inline with your competitors? If you have the lowest prices are you seen as low quality? Are you leaving money on the table? (In other words, will your customers still shop with you if you increased your prices?)
Rule of thumb #2: Are all of your product or services meeting the profit margin requirements that you need to make a profit? Not all products are providing as much to the bottom line as you think.
For example, if you own a car repair shop and have 2 different types of tires that you recommend to your customers do both sets of tires yield the same margin? Regardless of the retail price of the tires they should yield the same margin (percentage-wise).
Rule of thumb #3: You can only increase prices if you give your customers a reason to buy from you instead of your competitors. This is known as your value proposition. What is the one thing that separates you from your competition? What reason are you giving your customers to choose you, regardless of price, over your competitors?
Tip #8: Lower your Customer Acquisition Cost
We know that it is usually much cheaper to get a repeat customer than to acquire a new one. However, getting new customers is still very important to the success of the business.
The key is to constantly strive to lower the amount of money it costs you to get one new customer. This is what’s called the “Customer Acquisition Cost”.
This is helpful to know for two reasons:
Reason #1: If you know your current Customer Acquisition Cost you can then seek to lower it. The more you lower it the more profit you are growing.
Reason #2: If you know your Lifetime Value of a Customer you know how much you can spend on acquiring a customer without losing money.
For example, if you know that your total lifetime value of one customer (in profit) is $500 then you can spend up to $499 in acquiring that customer.
The goal, of course, is to constantly lower the acquisition cost. This is why it is very important to know your numbers.
Tip #9: Increase the Profit Per Employee
Every task that your employees do need to either help your business make more sales and/or decrease expenses. That’s it. If you do this correctly then everything that your employees do will positively impact profit.
Are there tasks that your employees are doing that are not helping you increase sales and/or decrease expenses?
If there is an employee that is not either helping you grow sales or help with decreasing expenses then there is no reason to employ that person.
It is really easy for an employee to become really good (efficient) at doing the wrong things (not helping increase profit). Thus, they are not being effective.
The goal is to get every employee to focus on being effective at increasing profit.
For example, let’s say a dentist office has two hygienists that both produce excellent work. However, one hygienist takes twice as long as the other to service one patient. That hygienist is negatively impacting profit. They are taking up a spot that could be used for another paying customer.
A good way to measure how well your employees are positively impacting profit is by calculating your average profit per employee. The goal is to get that average up every single month.
Tip #10: Only spend money on expenses that give you a positive ROI
Before you spend any money you need to ask yourself if this purchase is going to pay for itself in the form of more profit.
So, if you spend $100 on something for your business it needs to be able to give you at least $101 back in value which would give you at least $1 in profit.
Think about it: Why spend money if it will not help you make a profit?
There is absolutely no reason to.
If you spend money and it doesn’t give you a positive ROI then you would have been better off not spending the money.
Remember, the entire goal is to make a profit. If the expense doesn’t help your goal then do not spend it.
At the same time, it is vitally important to control the existing expenses in your business. A great way to do that is to turn all expenses into a percentage of your sales for each month. That way, you can compare apples to apples and see if your expenses are rising or falling.
For example, if your marketing expense was 10% of sales one month and then jumped to 20% of sales the next month you would immediately notice this and investigate why.
The bottom line
Everything that you do in business needs to help you increase profit. Everything.
To do that you have to know your numbers. You have to understand your financials in and out.