In previous posts we defined profit and the factors which affect it, and discussed ways to increase profit in general and how to improve your gross margin. Today let’s look at ways to improve your profit by improving productivity.
Improving productivity is all about getting more sales per dollar of fixed costs. It can be achieved by increasing your sales at a faster rate than your fixed costs increase and/or reducing your fixed costs without affecting your sales.
Let’s start by looking at your fixed costs.
You must incur these costs to remain in business. In the short run, they do not change as your volume of sales changes. Examples include rent, wages, advertising (to a large extent), interest, and lease costs.
Some of these costs are discretionary in the sense that you can decide to reduce them simply by cutting back. Others, however, are committed, and you can’t avoid them.
To determine the critical things about each fixed cost, ask yourself a few questions:
- What service does this cost provide to my business? Can I obtain the same service from another source at a lower cost?
- If so, is it feasible to switch to another supplier of that service? If I did switch to another supplier, would I get equivalent quality and would this affect the quality of my product or service?
- If I were to spend more on this service, would it generate additional gross profit that exceeds the additional cost?
You’ll notice that all of these questions are directed toward what you’re getting for what you’re spending. They aren’t simply concerned about whether you can eliminate or reduce the cost.
Take wages for example. In difficult times, people often think of dismissing team members. This may be an appropriate course of action, but it should be considered carefully. More often than not, the appropriate strategy is to invest more in team training to show them how to improve customer service and how to sell more to your customers.
What about advertising? There’s a standing joke in the industry that 50% of your advertising is wasted. The problem is identifying which 50% it is! In fact, the 50% estimate is being generous. It’s probably closer to 100% that’s wasted—and at least you know which 100% it is…yours!
In a Business Review Weekly article, a manager of a major supermarket chain said, “91% of readers took very little notice of price and item ads, and only 9% looked at them forshopping purposes.” If that’s a fact, why do the major supermarkets still persist with this type of advertising?
The reason is that product suppliers pay for the ads and the supermarket gets to (1) promote its name and (2) create consumer perception that it’s a price-competitive retailer.
The only organisation that benefits—whether your advertising works or not—is the media company you use. They’re always ready to invite you to participate in special deals and supplements. And they’re pleased to give advice on how to structure your ads “to get results.”
But ask them to do a deal where you pay an amount per inquiry, and you’ll be met with stony silence. How many times have you been contacted by a newspaper or radio representative and asked how your advertisement worked?
This does not deny the value of advertising.
On the contrary, advertising is one of the best ways to increase your sales. The folly is spending on advertising that doesn’t work. You can learn how to create advertising that does work, and you can test the results.
When we talk about productivity, we’re talking about how to get the most out of your advertising dollar. This is unquestionably one of the major untapped areas of your potential profit growth.
Effective advertising is clearly one way to create new customers. This is a specialised area in itself, but there are 4 absolutely critical things to get right:
1. Target your customers—never try to appeal to everyone. Focus specifically on those people you know will benefit from your product/service. How you word your headline will be the primary factor in accurately targeting your offer.
2. Make your offer compelling and relevant to the market you target. Don’t be cute or clever. Say it exactly as it is.
3. Graphics and layout will make your ad readable and noticeable. Don’t try to make your ad look like an ad. Make it look like something worth reading.
4. Write your copy in terms that your readers can clearly understand. It must be specific and believable. If you have a clearly defined target market, and your offer is compelling and well stated, your copy can be poor, and you’ll still get a good response. But good copy writing won’t sell a poor concept/offer.
One of the world’s leading small business advertising specialists has used “split-run” tests (where one ad is run in half of a publication and a slight variation is run in the other half) to evaluate the relative performance of the 4 variables. From the response, he concluded a number of things:
| Great copy | will give a | 50% response increase |
| Great graphics | will give a | 150% response increase |
| A great offer | will give a | 300% response increase |
| Accurate targeting | will give a | 1,000% response increase |
A specifically focused target (i.e., people in the market who are predisposed to buy) is 20times more powerful than how you express your message. If you know exactly who is interested in what you have to offer, and you make an offer that’s compelling, you don’t have to be a brilliant copywriter to get a cost-effective response from your ads.
The only sure way to get customers to come back and act as advocates for your business is to give them absolutely superb service. They need to feel that you really care about them and that your goal in business is to delight them with the way you look after them. Most businesses fall short of this ideal, but it is an objective well worth striving to deliver.
Almost 70%, or 7 out of 10 customers, cease to patronise a business because of perceivedindifference. When you (personally) interact with various businesses, aren’t you inclined to deal with those who take the trouble to show they care about you? Do you “shop around” when you’re already delighted with the service you get?
It’s sobering to note that most businesses spend 6 times more trying to attract new customers than they do looking after the ones they already have. They believe they have to do this because their existing customers keep leaving, and new customers are needed to replace the old ones.
A leading stockbroker and financial planning company recently undertook a study on client satisfaction. They reported that just a 5% increase in customer retention would produce a 25% to 100% improvement in profit. To put it another way, it pays to look after your customers.
Let’s put some numbers on this.
Suppose you have 1,000 customers who spend an average of $250 per year with you. Suppose that you have a customer loss rate of just 10% each year, and a customer who stays with you deals with you for an average of 10 years.
Forgetting about inflation, each customer has a lifetime value to you of $2,500. Therefore, a 10% attrition rate is costing you $250,000 in potential future revenue each year.
Another thing that most businesses overlook is the simple act of asking the customer to buy. It’s no accident that McDonald’s is one of the largest and most profitable businesses in the world. The reason for this certainly isn’t the uniqueness of their product.
The fact is, nothing is left to chance at McDonald’s. Everything is done according to a plan.
Even the question,” … and will you be having fries and a drink with your meal today?” is part of a well-designed system. About 30% of the time, people say yes, even though they may not have originally intended to do so. The effect is a 30% increase in sales of fries or drinks and over 100% increase in profit contribution from those lines.
A restaurant owner used to ask guests at the end of the main course (without really thinking), “Would you like anything else?” The answer usually was, “No, just some coffee, thanks.”
He changed this to, “Now, can I offer you a beautiful platter of Australian and New Zealand cheeses, or would you prefer to make a selection from our new dessert menu? The pies are absolutely delightful today!”
The result was that he instantly tripled dessert and cheese platter sales and still got to make the coffee sale. It’s all in what you say and how you say it.
Word-of-mouth referral is the best means of creating new customers. But satisfiedcustomers do not become advocates for your business—delighted customers do!
Most people don’t fully appreciate the powerful dynamics of customer retention and frequency of contact. This is reflected in the next table.
This table demonstrates the powerful effect of a relatively small improvement in the critical variables—customer attrition rate, new customer attraction rate, frequency of customer purchasing, and the average value of each sale—on total sales revenue.
|
The Components of Sales
|
PresentRate |
Present Position |
PossibleRate |
PossiblePosition
|
| Number of Customers |
1,000 |
1,000 |
||
| Less Customers Lost |
10% |
100 |
5% |
50 |
|
900 |
950 |
|||
| Add New Customers |
10% |
100 |
12% |
120 |
| Total Customers |
1,000 |
1,070 |
||
| Sales Frequency |
10 |
10 |
11 |
11 |
| Number of Transactions |
10,000 |
11,770 |
||
| AverageSale($) |
$25 |
$25 |
$27.50 |
$27.50 |
| Total Revenue |
$250,000 |
$323,675 |
Perhaps the best-kept secret in the business world is that it is very simple to improve the profitability of a business, but there’s a catch. What to do is the easy part. Being willing to do it is the stumbling block.
In every case, business success stories are associated with people who had the courage to change their way of doing business. In the case of the failures, it’s been their refusal to try something different. Have you ever said, “That sounds okay in theory, but it won’t work in my business”?
There are no special tricks to make a business more profitable. The Business Advisor who makes a living helping people in business can’t pull rabbits out of a hat. However, there is one overriding consideration that must be accepted:
If what you’re doing now isn’t working, then you must do something different!
In every industry—and irrespective of the state of the economy—there are some businesses that consistently outperform others in their industry, not by small amounts but by staggering amounts. This is called the margin of excellence. They have it right, and the others have it wrong. It’s as simple as that.
Close enough is NEVER good enough. Improved business performance comes from a willingness to do something different and then getting the details right. If you get all the little things right…the big picture looks after itself.
The following example is an actual case in point. The result in the first year was a satisfactory 58% increase in profitability. The business itself increased in value by more than $75,000.
Today, this business is generating well over $100,000 in net profit. It’s a bigger business today than it was, but it is also much more profitable in terms of Return on Capital Employed and in absolute dollars earned for the owner.
This was part four in a series:
Part 2: How to Increase Profit
Part 3: Improving Your Gross Margin
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