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Improving The Bottom Line - Small Changes, Big Outcomes

The Team - Sunday, May 30, 2010

Nobody wants to leave money on the table. On the other hand, for most products (the exception is a so-called prestige good), the most basic rule of economics is:

Prices up = Less sales

Prices down = More sales

This means that, when you have lots of customers, some questionnaires and some mathematics can be applied to determine a price at which you will maximise profit (talk to us if you want to do this).

Some businesses discover that there is more profit in raising prices, while for others the reverse is true. Of course, lowering a price can have other consequences, such as giving the impression your company is in trouble and/or driving competitors to lower their prices and reduce everybody’s profit to unsustainable levels.

However, there are other elementary steps that a business can take to increase profit. Small changes can lead to large cumulative results. In the following example, Sales are increased by 5% (a small amount), Cost of Goods Sold (COGS)text are reduced by 5% and Overhead Expenses are reduced by 5%:

  Before After
Increase Sales by 5%
1,000,000
1,050,000
Reduce COGS by 5% (67% to 62%)
670,000
651,000
Reduce overheads by 5%
150,000
142,500
Net Profit
180,000
256,500

Wow!

Initially, let’s just look at increasing sales by 5%. In a later blogs will look at reducing COGS and overheads.

The ways that we can increase sales are: an increase in the number of customers; an increase in the number of average sales; and in increase in the number of sales by each customer.

Our goal is an increase of 5% - right? What would happen if we achieve a 5% increase in each of the ways in which to increase sales? Here is an example of what can happen:

  Before After
Increase customers by 5% 1,000 1,050
Increase Average Sale by 5% $1,000 $1,050
Increase repeat business by 5% 20 21
Gross Revenue 2,000,000 2,315,250

That’s nearly a 16% increase in sales.

Pick just one of increasing the number of customers; increasing the number of average sales; or increasing the number of sales by each customer. Will you:

  • Use a new means of getting new customers (a website? social media?).
  • Increase average sales by up-selling or cross-selling.
  • Stop offending customers with a resultant increase in sales by customers.

Good business is applying basic business principles. That’s just part of what we do at NOW Business Mastery to help our clients increase their profitability.

Comments
Sarah Mitchell commented on 11-Jun-2010 04:39 AM
Thanks for the good reminder about other ways to improve your bottom line. As a small business owner I know from experience putting your rates up is the most obvious thing to do. Increasing a single sale (the hairdressing salons are experts at this) or building a relationship that promotes repeat customers in easier strategy.

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