Are you working hard but not making the profits you want?
You see, most business owners want to make more profits and grow their business but are not sure how.
Here’s the thing…
To grow your business, there are 6 key drivers of profit to focus on.
It’s called your Profit Engine…
And you can use this engine to build a Corolla or build a Ferrari.
In fact, it is one of the most power business secrets you will ever learn.
By understanding how your Profit Engine works, you will start to multiply your profits, not just add to them!
Here’s how it works….
Your Profit Engine
Firstly, your business needs to generate leads or enquiries. Then, your job is to convert these leads into sales, and that builds your customer base. But getting customers isn’t just a one-time deal. Your job is get them to spend them more and more with you each time and come back to you again and again and again.
Which leads to the next 2 parts of your Profit Engine – your Average Sale Value and Purchase Frequency. Your Average Sale Value is how much your customers spend on average. Your Purchase Frequency is how often someone come back to buy from you. Your number of customers multiplied by your Average Sale Value multiplied by your Purchase Frequency gives you your Revenue.
Revenue is a great start but you are in business to make a profit. So next multiply your revenue by your Gross Margin. This is what % profit you make in providing your service or product. Then, you subtract your Expenses from this gross profit, and there you have your final profit figure. Here’s how your Profit Engine looks:
| # Leads |
| x |
| Conversion Rate |
| = |
| # Customers |
| x |
| Average Sale Value |
| x |
| Purchase Frequency |
| = |
| Revenue |
| x |
| Gross Margin |
| = |
| Gross Profit |
| – |
| Expenses |
| = |
| Profit |
If you want more customers, you’ve got to either get more leads or convert more of the leads you are getting already. To get more revenue, you’ll need to get your customers to spend more with you or come back more often. And if you want more profit, it’s about focusing on your revenue drivers or improving your margins or managing your expenses better.
Let’s Put in Some Numbers…
The best way to understand your profit engine to is to put in some numbers. So lets look at some numbers from a real business when they first came to us. They were generating 400 leads, converted 33% of them into sales, and ended up with 132 customers. These customers spent about $1,250 on average with a purchase frequency of once per month. This led to a monthly revenue of $165,000, with a 60% margin, making their gross profit $99,000. They had expenses of $90,000 a month, leaving them with a profit of just $9,000 a month.
Here’s how their Profit Engine looked:
| # Leads | 400 |
| x | x |
| Conversion Rate | 33% |
| = | = |
| # Customers | 132 |
| x | x |
| Average Sale Value | $1250 |
| x | X |
| Purchase Frequency | 1.0 |
| = | = |
| Revenue | $165,000 |
| x | x |
| Gross Margin | 60% |
| = | = |
| Gross Profit | $99,000 |
| – | – |
| Expenses | $90,000 |
| = | = |
| Profit | $9,000 |
The Game of 10%
To truly understand how the Profit Engine works let’s play the “Game of 10%.” What if you could improve each of your profit drivers by just 10% over the next 12 months?
1) Leads
What if you grew your leads by 10% from 400 to 440 leads? This can be achieved through smarter marketing or encouraging word-of-mouth referrals. Just think, if every customer referred you one person in a year, you would double your business! Even if only one in ten did, you would still get that 10% boost.
2) Conversion Rate
This is about converting more leads into sales. If you can improve that by 10%, your conversion rate would go from 33% to 36%. This is all about improving your sales process, defining what makes you stand out, and making sure to follow up with your customers. By making these changes, your customer numbers jump from 132 to 158.
3) Average Sale Value
One way to increase your Average Sale Value is to increase prices or sell more high value items. A simple strategy is to ask the famous McDonalds line “would you like fries with that?” Every business had fries! So what are yours?. For example, a lawyer we worked with simply asked every client, “By the way, have you updated your will recently?”. This generated an extra profit of $10,000 a year in wills alone. In this case, the Average Sale Value of $1250 becomes $1375.
4) Purchase Frequency
Next go to work on the frequency of purchases. By putting more effort into marketing to your existing customers and encouraging repeat sales, your business can see a great increase. In fact, it is often easier to get an existing customer to come back than to get a new customer. In this example 1 becomes 1.1, and the revenue grows from $165,000 to $241,577.
5) Gross Margin
Your Gross Margins are all about pricing, negotiating good deals from your suppliers and efficiencies. By playing the Game of 10% , in this case your gross margin goes from 60% to 66%, giving you a solid gross profit of $159,440.
6) Expenses
Finally, look at where you can trim your costs by 10% which is something most businesses can do. This usually just requires a close look at where your money’s going and how you can work more efficiently. In our example their expenses would be reduced from $90,000 to $81,000 in expenses
All these changes leads to a new profit of $78,440,. which is a huge 46% increase in revenue and a massive 772% increase in profit!
Here is how the numbers work….
| # Leads | 400 | 440 |
| x | x | x |
| Conversion Rate | 33% | 36% |
| = | = | = |
| # Customers | 132 | 158 |
| x | x | x |
| Average Sale Value | $1250 | $1375 |
| x | X | X |
| Purchase Frequency | 1.0 | 1.1 |
| = | = | = |
| Revenue | $165,000 | $241,577 |
| x | x | x |
| Gross Margin | 60% | 66% |
| = | = | = |
| Gross Profit | $99,000 | $159,440 |
| – | – | – |
| Expenses | $90,000 | $81,000 |
| = | = | = |
| Profit | $9,000 | $78,440 |
Now you may not be able to get a 10% increase in all areas, but some areas you may be able to generate more, such as 20% or 30%.
The important thing is to know your numbers and set targets to improve each of your profit drivers.
That way you can multiply your profits – not just add to them!
If you’d like some help in working out your Profit Engine, simply Contact Us and we will send you a template for you to use.
