Make more money,save more money, be more competitive
For many business the start of the year is the time to take a look back at the previous year and begin to plan for the new year ahead.
Inevitably part of this process will involve a “look at the books” and, more importantly, a review of the bottom line. In simple terms every business strives to make more money, save more money and be more competitive since these are the driving forces behind performance and business growth.
If you can address these aspects of business then your can reap the rewards in 2015.
The theory of “aggregation of marginal gains” has been a buzz word in the sporting goods industry since Dave Brailsford used this theory to great effect to bring British cycling onto the global stage as a highly successful competing nation – The principal being that a multitude of small changes can have a large overall effect.
In practice, this theory has been around for years.
In the 1980’s, for example, American Airlines removed a single, unnoticed olive, from every salad served to passengers and the airline saved $40,000 per year!
But can you apply the same rules in your business -whether you be sports brand or sports retailer?
The question is, when it comes to efficiencies, cost-savings and competitive edge in your business, where’s your olive?
Five simple factors
So what are the simple factors that can be multiplied to deliver stellar bottom line profits?
The total number of people who have been contacted, visited your store/website, communicated with during the year
The percentage of people who actually make a purchase e.g. if ten people walk in your store and 3 purchase that is a 30% conversion rate.
Average selling price £ sale (ASP)
The average £ amount per sale, estimated over the course of the year i.e. annual revenue of £350,000 divided by 10,000 individual sales = £35 ASP
Average number of transactions
The number of purchases the average customer will make over the course of a year.
The profit percentage on every sale. i.e. if a business sells something for £1000 and profit was £250 then profit margin is 25%.
So how does this relate to top-line revenue and bottom-line profit? Lets see
In your sample company, we use a very simple formula to multiply the factors we’ve discussed. Note that since this formula uses multiples factors, instead of just adding them, the cumulative impact is massive.
The “5 Ways Formula” looks like this:
leads x conversion rate = customers
customers x ASP x number of transactions = revenue
revenue x profit margins = profit
Lets say we have estimated or fully determined the following numbers:
4000 x 25% = 1000 customers
1000 x £100 x 2 = £200,000 revenue
£200,000 x 25% = £50,000 profit
What does all this mean?
In simple terms you are running a business that converts one out of four prospects into paying customers. Those customers average two purchases at £100 per purchase each year and your company enjoys a 25% profit margin on revenues of £200,000
It also means your total profit for the year is £50,000.
So what would happen if, over the course of the next year, you were able to change one (or all) of these factors?
Lets say that they all changed by 10%;
4400 x 27.5% = 1210 customers
1210 x £110 x 2.2 = £292,820 revenue
£292,820 x 27.5% = £80,526 profit
Examine the numbers closely and you’ll see that the 10% increase is incremental, which means that you could easily nudge numbers up by that amount over a period of months – or even weeks.
The bottom line is that the new bottom line looks very interesting.
Even though we’ve increased each factor by just 10% (including top line revenue) we were able to boost bottom-line profit by 61% – or a total of £30,526.
Think these results are impressive? Do some maths on your own and see what the numbers look like if you increase each factor by 30%, 50% or even 100% down the line or even just increase one element.
The key is that we are multiplying factors – not adding – which has a massive impact on profit. The “5 Ways” isn’t a complicated numbers game. Its simply looking at your business in a different way and working with numbers that should exist in every company.
As part of your review process do some further work with your own numbers and brainstorm ways in which you can increase the numbers in each category:
Increase leads: use local marketing, contact clubs/schools; drive your social media activity, build your customer base
Get more customers coming back: introduce a loyalty/voucher scheme e.g. £10 off their next purchase.
Increase the amount they spend: think about “checkout candy” impulse purchases – learn from the supermarkets.
Raise your profit margins: buy better/smarter. Push you suppliers for better terms.
Remember “profit is sanity, turnover is vanity”.
Use your time reviewing your business effectively and you’ll be more than happy with the ultimate results.