It wasn’t long ago when it seemed that the answer to every business challenge was to “get out and sell more”. Now, business owners are scrutinizing their operations for ways to squeeze out every last drop of profitability. This is a healthy exercise for any economy to undergo and the surviving businesses tend to emerge from difficult times as leaner, more disciplined enterprises poised to take advantage of every opportunity as the general market conditions improve. Let’s look at four ways to increase your profitability and grow your business.
Increase Average Price
The classic example of increasing prices was when Starbucks turned the 25 cent cup of coffee into a $3.50 specialty drink. Part of their success was with branding and perception, which can both be powerful tools for increasing your prices as well. Do your customers treat you as a low-cost provider in your industry? How can you change that mindset? One of the best ways to overcome the customers’ arguments to paying a higher price is with value-added services. While “value-add” is tossed around an awful lot these days as a buzzword for consultants and marketing spinsters, savvy entrepreneurs develop ancillary services around their core products to differentiate themselves from their competition and justify higher average prices. Whether your barista takes an extra few seconds to smile and ask about your day or your key supplier includes your marketing on their website, these services set their businesses apart and keep you happy paying a higher average price because you actually receive more value. Do the same for your customers to increase your profitability.
Increase Average Transaction Quantity
Assuming your products and services generate more revenue than they cost to produce, increasing the quantity each customer purchases also increases the average sale and is another way to improve profitability. Offering discounts at certain volumes is a great way to convince your customers to buy in bulk. A small discount at 5,000 units and a larger discount at 10,000 trains them to think in bigger numbers and to find ways to use more of your products. Choosing your discount carefully will ensure you improve your profitability at the higher volumes.
Increase Number of Transactions
Once your average transaction value is where you want it to be, increasing the number of transactions is your next challenge. Marketing is the key here, both to your existing customers and to potential new customers. Highlight your value-added services, find your target market and get in front of them consistently, sell, sell, sell. Customer loyalty cards are often a great tool to increase the number of times your existing customers purchase. If they only need three more purchases to “get one free”, the motivation is strong to keep buying.
Cost reduction tends to be the default for business owners when pressed to increase profitability and most businesses are ripe with opportunities to streamline operations. Costs generally fall into three categories:
Reduce Average Cost of Goods Sold
Cost of Goods Sold consists of those expenses that vary directly with the volume of revenue generated. Gross Profit equals Sales minus Cost of Goods Sold and is the revenue left over to cover selling and administrative functions and to pay yourself. Reduce variable expenses with improved engineering, outsourced manufacturing, less expensive materials and streamlined delivery.
Identify and Reduce Direct Costs
Direct Costs are those overheads that can be easily traced to a revenue generating activity but not always to a specific unit of product. Examples are advertising, sales salaries, and location-specific overhead in a business with multiple locations. The important thing to remember when reducing direct costs is that these costs generate revenue. Cutting advertising to save a dollar today can come back to haunt your business in the form of reduced sales tomorrow.
Overhead is that administrative function that is necessary for running a business but not tied to revenue in any way. These are expenses such as rent on corporate headquarters, administrative salaries, insurance, attorney fees, etc. Reducing your overhead is only limited by your imagination, frugality, ability to maintain compliant and risk tolerance. Perhaps you don’t really need a full-time CFO and can outsource that function to your CPA; you find your IT administration can be handled more efficiently by a third-party; or your insurance agent can restructure your policy to provide coverage targeted to your specific risks at a lower cost. Savings in overhead generally roll directly to your bottom line to improve profitability.
There are many other ways to grow your business during tough times, so keep working on your business and thinking forward. When the economy booms again, your business will be well structured to maximize all of the opportunities to grow and profit.