How To Drastically Increase Your Profits

How one little 10% Change Can Double Your Profit

For the purpose of this illustration, we'll use a business with a million dollar turnover with marginal costs of $700,000 leaving a gross profit of $300,000 or 30%. The fixed costs are $200,000 which gives us a net profit of $100,000 or 10%. Let's assume we increase our price by 10%. I know a lot of you will throw your hands in the air proclaiming "We can't do that, it would cripple our sales!" But having worked with thousands of businesses, we've found that to be the case in less instances than you would think. Many of our clients have increased their prices dramatically only to find sales increase with as well!

Here's the new equation:

BEFORE

 

AFTER

$1,000,000

Turnover

$1,100,000

700,000

Less Marginal Costs

      700,000

300,000

Gross Profit

      400,000

200,000

Less Fixed Costs

      200,000

$100,000

Net Profit

    $200,000

As you can see, the price increase goes straight to the bottom line doubling the profit with a mere 10% price increase!

 

How Three Tiny 5% Changes Make A Massive Increase In Profit

Let's now look at how, by making very small improvements in certain areas of a business, you can make another dramatic increase in the bottom line. The three areas we'll affect are marginal costs*, fixed costs and sales. Marginal costs are those costs directly linked to sales as opposed to fixed costs which don't alter whether we make a sale or not. Lease, wages and electricity, for example, are fixed costs. Whereas commissions and material to make the product sold, are marginal costs.

Using a variance of just 5% on the same business model we used in the previous example, here's the calculation. In the left hand column, we show the business before the 5% improvements. The right hand column shows the business after we?ve:

Increased sales (turnover) by 5%

Decreased marginal costs by 5%

Decreased fixed costs by 5%

BEFORE

 

AFTER

$1,000,000

Turnover

$1,050,000

700,000

Less Marginal Costs

       698,250

300,000

Gross Profit

       351,750

200,000

Less Fixed Costs

       190,000

$100,000

Net Profit

     $161,750


That's a 61.75% increase in net profit, yet all we've done is make three small 5% changes.


Note: in calculating the 5% reduction in marginal costs, we must take into account the fact that they are directly linked to sales. Therefore, if we?ve increased our sales (turnover) by 5%, we must increase marginal costs by 5% to $735,000 before deducting the 5% decrease. ($735,000 - 5% = $698,250). Obviously there is a limit to how much you can decrease your marginal and fixed costs and in some areas it would be madness to cut costs where it effects quality that is necessary (or even your main point of difference). There is however, no ceiling to how much you can increase your turnover so let?s focus on that...

 

The Turnover Drivers Multiplying Effect

There are three key ways to grow turnover. You can:

* Increase the number of customers

* Increase the number of transactions

* Increase the average sale value

These are called the 'turnover drivers'. The number of customers served per annum (Customers) multiplied by the average number of transactions per annum per customer (Frequency) multiplied by the average spend per customer equals your annual turnover. For example, if we had a menswear store specialising in suits, with 1000 customers who buy twice a year and spend on average $500 per visit, then the formula looks like this:

Customers  x

Freq  x

Av. $ Sale 

=  Turnover

1000  x

2  x

$5000 

= $1,000,000

Let's now look at what happens to a business' turnover by making small increases in each area. If we can increase each turnover driver by just 10%.

Customers  x

Freq  x

Av. $ Sale 

=  Turnover

1100  x

2.2  x

$550 

=  $1,331,000

That's a 33% increase in turnover with three 10% changes. Let's go a step further and see what happens if they get pro-active in their marketing and increase each turnover driver by 25%.

Customers  x

Freq  x

Av. $ Sale  x

=  Turnover

1250  x

2.5  x

$625 

=  $1,953,125

Now the turnover has nearly doubled! What if we can increase each area by 50%?

Customers  x

Freq  x

Av. $ Sale 

=  Turnover

1500  x

3  x

$750 

=  $3,377,500

The turnover has trebled!

You can begin to see the multiplying effect. You see, most business owners try to attract more sales (customers) to grow their business but if you double the number of customers, you only double the turnover. As you can see by the above examples, you can double the turnover with just a 25% increase in each turnover driver. And in fact, should you manage to double each, you would achieve a staggering 800% turnover increase! This is why you see such impressive results in the Case Studies section of this website.

So there you have it, three simple ways to dramatically increase the profitability of your business. If you'd like to know more about how these ideas and others can be specifically applied to your business click and email us for a free consultation. As mentioned on our home page, these consultations take around 90 minutes and are designed to show you how to leverage your business so you make more money with less effort.

Having conducted well over 4000 consultations with business owners, it is not unusual to find potential growth of 50% or more. Consultations are valued at $295 but as a visitor to our website, we'll waive that fee if your application is successful. So if you're serious about making serious money, call us on 1300 886 706. Or click here for a FREE Profit Analysis.