It is a bold statement to say you can double your profits in a business
For years I have run various businesses and read all types of resources but it wasn’t until I listened to a podcast by Preneurcast that it all really came together for me
Now it wasn’t that I didn’t understand or even contemplate the various parts of my businesses in motion to drive them towards greater profit, but it was this framework that clearly showed how the machine of business is all interrelated
Just increasing each component of that framework by 10% you can double your profit
Let me explain…
It is because of the cascading effect from one component to another and this flow on effect is where the beauty of the maths works to your advantage
The 7 parts of a business that work together are;
- Traffic – or the number of prospects that any business has from one month to the next. This is where many owners spend all the time trying to advertise and promote to “get more customers”
- Opt-ins (engagement) – Out of all those prospects that come by your business whether online or in the real world some will take an interest.
Maybe they will look at a few pages on your website and then fill out a form or pick up the phone or maybe they we try on a few clothes in your retail store. You get the picture. But not all are customers. Some will leave before they are comfortable to purchase anything
- Conversions – Some of these prospects will go on to become customers by making a purchase. Get out their credit card or send you an order. Basically committing to spend money with you
- Items per sale – As it says it the amount of items included with this particular sale
- Average sale value – Out of all the customers that purchased something over a given period. Add up the total value of all sales and then divide it by the number of individual items sold during the same period. This gives you an average per item
- Quantity of transactions per customer – How often do your customers come back to purchase again in a given period. Work out what the average is
- Profit Margin– work out as a percentage what the cost is of producing your product or service. After all the costs are taken out what is left over is the net profit. Express this as a percentage of your overall income.
Now lets work through an example of a clothes store so you see it all in action
In a busy shopping centre the clothes store sees 10,000 visitors to the centre. Out of all those visitors 100 come into the store each day
So the “traffic (1)” is 10,000 and the “opt-ins (2)” is at 1% or100.
Out of the 100 prospects that enter the store and show some interest just 10 make a purchase
So the “conversions (3)” is 10 or 10%
Each customer only purchased a single item so the “items per sale (4)” is 1 at $100
“Average sale value (5)” is also $100.
How did I get to that calculation? Well the store is open, say, 350 days per year.
We know that each day on average 10 sales are made at $100 each. Total sales per annum would be 350x10x$100 = $350,000 revenue. Divide this by the number of sales (350 days x 10 sales per day) 3500 = $100.
Unfortunately each customer only purchases once per year on average so the “Quantity of transactions per customer (6)” is 1.
Profit margin according to the accounting system indicates that it is 20% after all expenses. Or $350,000 x 20% = $70,000
The magic number in business is 20% in this case
Phase 2… where the magic begins to show
Now we’ll work through some small adjustments of 10% at each step
Increase in advertising by the shopping centre has lifted the “traffic” by 10% 11,000.
Improve promotion at the store front and through out the centre have increased the number of people going into the store by 10%. So now we have 11,000 people x 1.1% going into the store (opt-ins) = 121
Out of those 121 prospects with improve service by staff now we have an improved conversion at 11%.
So 121 x 11% is 13.3 customer sales on average per day
Part of the improved staff service has now increased the number of items per customer. For every customer they manage to sell an additional 10% of items so the average “items per sale” is 1.1
13.3 customer sales x 1.1 items = 14.6 items per day
Average sales value has now increased from $100 to $110 due to more upsells to higher priced items.
14.6 items per day at $110 = $1606 per day
But this doesn’t include our returning customers.
Now because of the better staff service some customers come back during the year. 1 in 10 now return to purchase again. So now “transactions per customer” is 1.1 per annum increasing by 10%
$1606 per day from new visitors plus the increase in return customers of an additional 10% = $1767 per day
Now trading days hasn’t changed at 350 but daily takings are now up to $1767
Revenue for the year now stands at $618,450…. Up $268,450 or 76%
Previously profit was 20% but after some negotiations with various suppliers and improvement in other aspects of business expenses it has improved on average to 22%
$618,450 x 22% = $136,059 up from $70,000
OR 94.37% increase in profit just by tweaking each area to achieve a 10% improvement
Now 10% is achievable for nearly everyone. Some areas may see an even greater increase which will flow through to even bigger profits
If you have any questions or would like some assistance putting your numbers together just click here and send me a quick message
About Peter
Digital marketing strategist for small to medium business.
I help business owners with their marketing to target and nurture more high value clients, to deliver more profit and grow their business by implementing proven tactics and strategies.
I show you successful lead generation and marketing systems that will bring in an unlimited stream of quality clients to work with.
A critical part of our system is to provide regular checks to ensure you reach your desired success as well as tap into our knowledge and support
I use statistics and data to make smarter decisions in business. Rather than the “spray and pray” marketing of old, I have been able to leverage time and resources to deliver a far better outcome and profits.