Business Builder: Live and Breathe the Five-Part Formula to Increase Profit

Now that you have created a strong, clear business vision that is realistic and achievable, and have posted your vision in a place where you and your staff will be able to see it on a daily basis, you’re going to achieve your vision (and your dreams!) by adopting the five-step process into all areas of your business.

It’s one thing to try a new marketing strategy, but it’s another to change your approach altogether. It’s just like dieting. Sure, if you cut 20 percent of your calories for two weeks you’re going to see some results. But, the minute you go back to your old patterns, the results quickly disappear.

Temporary changes generate temporary results. Sustainable results require changes in behavior; the removal of old habits and the creation of new ones. The five-part formula is so effective because it touches on each and every area of your business. It will improve and increase and generate and sharpen and strengthen everything that you and your employees do.

Once you complete a step, you’ll never go back to your old way of doing things again. This is a program for positive change and powerful results. The change is long lasting and the results are far reaching—a 10% increase in each of the five areas can lead you towards doubling your profits (not revenues!).

The five ways that any business can increase its profits are:
Lead Generation (any strategy you use to get people to call or walk through the door)

Conversion Rates (any strategy you use to get people to buy from you)

Number of Transactions (any strategy you use to get existing customers to buy from you more often, or stay loyal to your business)

Average Dollar Sale (any strategy you use to get customers to spend more money in a single transaction)

Profit Margins (any strategy you use to maximize the percentage of the cost of each product/service that is profit)

Let’s get used to working with the basic formula on which the five-step process is based. You’ll want to post this formula somewhere visible, where you can see it on a regular basis.

# of Leads
% Conversion Rate
# of Customers
# of Transactions
Average Dollar Sale
% Margin
$ Profit

Each area influences the bottom line—your profit. Work on each line sequentially, and the impact on your profit will build over time.

A nominal 10% increase in each of the five factors would look like this:

Starting Point Goals (10% increase)
Leads 4,500 / Leads 4,950
Conversion Rate 30% / Conversion Rate 33%
Customers 1350 / Customers 1633.5
Transactions 1.3 / Transactions 1.43
Average Dollar Sale $140 / Average Dollar Sale $154
Revenue $245,700 / Revenue $359,729.37
Margins 24% / Margins 26.4%
Profit $58,968 / Profit $94,968.55

Take the existing numbers for your business: the current number of leads, conversion rate, number of transactions per customer, the average dollar sale and your profit margins. Now run the numbers and see what a 10, 20 and 50 percent increase in each of the five steps would look like. The point here is to understand how small increases will have big impacts on your bottom-line profits.

Let’s look more in-depth at each of the five steps.

Step One—Lead Generation: How can you get more people to walk through your door, pick up the phone or visit your website?

Your leads are your prospects or potential customers. They are people who have taken action in response to your ad or promotion and have shown interest in your product or service, but have not become a customer because they haven’t purchased yet.

Lead generation is the first step in increasing the number of customers you have (remember, customers are the by-product of two things: leads times the conversion rate). You have to generate more leads and get more of those leads to make purchases in order to increase your customer base. This is a very important step because your “cost of client acquisition” (price you pay to acquire a new client) is the most expensive function of nearly every business on the planet.

So lead generation is about finding cost-effective ways to reach the people who need or want what you have to offer and getting them to act. This is what the majority of marketing strategies are trying to do. This includes: advertising, special promotions, press releases, website, online marketing, direct mail, flyers, publicity, coupons and referral partnerships.

Step Two—Conversion Rate: How can you get the people who walk through your door, pick up the phone, and visit your website to buy something?

Conversions are the second factor in the customer equation. A conversion rate is simply our leads divided by our number of transactions in a specific time period. This is a key focus of your business and your staff’s time. After all, why spend time and money attracting tons of qualified leads if you can’t make them buy. Some confuse being busy with being successful! Don’t let it happen to you.

Several aspects of your organization impact your conversion rate: the strength and effectiveness of your sales team, your sales process, staff training and development programs, sales scripts, staff happiness, your business’ image and its first impression on customers.

Step Three—Transactions: How can you get your customers to buy from you more than once?

The process of attracting and converting a customer is one that costs you money. Customers cost you money. They’re an investment that you need to make the most of to stretch your lead generation dollars. You can reduce the cost of your customer by increasing the number of times that they purchase from you. This increases the total number of transactions in your business and the amount of money that flows in. So instead of continuously chasing down leads and converting them to customers, increasing transactions is about keeping our existing customers loyal and coming back to spend money.

This includes exceptional customer service, loyalty programs, incentives, newsletters, convenience services and bonus amenities.

Step Four—Average Sale: How can you get your customers to buy more from you each time they buy?

Your total revenue is the product of how many customers you have, how many times they purchase from you, and how much they spend. Increasing the average amount of money customers spend with you is the final way you can increase the amount of money that comes into your business. It’s amazing how small increases in this value can have big impacts on your revenue.

If I were to come into your business tomorrow and you immediately needed to increase profits, this is the first place I would look and the easiest area to make a large improvement in your profits. You’ll have to show your customer that they needed or want more than what they purchased. The amount that you are able to increase will depend on the type of business you are in—it’s easier to sell gel pens than an additional dishwasher—but generally every business can find opportunities to increase this figure.

Ways of increasing your average sales transaction could include: impulse and add-on items, sales scripts (would you like fries with that?), stock, price increases, upselling, opportunities for packaging and widgets, and merchandising at your point of sale.

Step Five—Margins: How can you make more profit off each product and service you sell?

The last opportunity you have to influence your profit is your profit margin. Your total revenue times your margin as a percentage equals your total profit.

Essentially, your goal here is to make your profit margin as high as possible. As the final factor in the profit calculation, increasing your margin is a vital step towards maximizing your profits.

If your margins are too low, you’ll never make any money, regardless of how many customers you have, how often they buy from you, or how much they spend. Your revenue will perpetually go back into your business and be spent on costs. You maximize your margins by cutting your costs (rent or lease, business supplies, production costs, salaries), or increasing your prices.

Alarmingly, many business owners do not genuinely know their weekly/monthly/annual profit. You need to go into the business of generating a profit (this will be a paradigm shift for many . . . it is not about greed, it is about looking after those you care about. The more money you make, the more you can provide for your family, charity, your church, etc.); work towards increasing that profit each and every day, week, month and year.

Now that you have a good grasp on how the five-step formula works, include your staff in the process.

Your employees are a powerful resource–they ultimately are the people that you will need to trust and empower to run the business. They are the people that your customers come into contact with on a regular basis, and represent your business image, brand and message. Let them in on what you’re doing, and educate them on the five-part formula. Show them how their actions, input and skills contribute to the operations and profitability of the business.

Start paying attention to your current numbers and tracking systems; run some reports and get an understanding of your current situation.

Finally, think about these questions:
Where do your customers come from?
What marketing campaigns work the best?
What lead generation strategies work the best?
How many of your customers buy from you?
How often do they buy from you?
How much do they buy from you?
What do your existing profit margins look like?
What percentage of your items are high margin, and which are low?

Let’s keep working to achieve your vision, and maximize profits while we do.


About the Author

Robert Ritch is a successful entrepreneur and business consultant, and has helped numerous small businesses increase their profits by assisting them in planning the steps they need to take and the order they need to take them, and in identifying and reaching their target market. Contact Robert at ceo@robertritch.com or at robertritch.com.

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