In business, leverage and focusing on numbers is critical. Do more, with less and see your ROI grow. Improvements of > 30% in Net Profit ARE possible. Don’t believe the naysayers. There is no free lunch. Put in the work, read, study, learn, get a coach – do what it takes to make your business a roaring success.
As business owners, we are in the ‘profit game’. We may all have our unique reasons and motivations (mine is to build “thriving, prosperous communities through business growth”), but to win we need to make profit, bottom line. There are no compromises on that, because if businesses make losses, they won’t be businesses for very long.
The most important formula you can learn in business is one that, if learnt and applied properly, can add massive profit to your bottom line and help you win the game. We refer to it as the Business Chassis (because you build your ‘Ferrari’ of a business on it!) and it embraces the principle of leverage, doing more with less (and the rather oddly, lesser-known mathematical capability, ‘divide to multiply’!)
Before we kick off, let me ask you: Do you see marketing as an expense in your business, or as an investment? Remembering that the goal of marketing is to create a niche, a uniqueness about your business so that you never have to compete on price, how do you approach it? The chances are your accountant will tell you it is an expense in your Profit & Loss statement. Not wrong, but really not true in a business growth sense. Here’s why…
MARKETING IS AN INVESTMENT
Done well, marketing has a few elements to it. First, you need to measure everything. When a potential customer walks through your door (or a virtual door, nowadays) ask them how they found you. Was it through the advert you placed, was it word-of-mouth from a previous customer or a networking event you attended or a tradeshow? You need to know the source of every lead so that you can figure out which of your attraction strategies works best for your particular situation. If you don’t measure, you can’t manage, but by measuring you will know how many new leads the money you spent on the advert bought it and from there you can work out how many customers that converted into…Speaking of adverts, when you design them, design at least ten to twelve and test each out. 80% of marketing fails, so it is imperative to have a wide set of strategies and not rely on a ‘silver bullet’ approach.
ACQUISITION COST vs LIFETIME VALUE
By working out how many customers your strategies brought in you can calculate the Acquisition Cost of each one by simply dividing the amount of money you spent on those strategies by the number of customers. You want the Lifetime Value of the customer to be bigger than the Acquisition Cost. Lifetime Value (how much each customer spends with you over the next several weeks, months or even years) can be hugely affected by how you engage them, so make sure you study ways to increase it. Read books, study sales techniques, get a coach – do whatever it takes in your environment to focus on delivering increased value so that customers spend more and come back frequently, because repeat business is profitable business.
You are buying customers. If Lifetime Value is greater than Acquisition Cost, your Return on Investment is positive. If I promised to give you $2 for every $1 you gave me, the only question would be how many dollars you could give me, because you’d be making 100% every time. In fact, you’d probably start using the profit dollars to give those to me also! In exactly the same way, if every dollar invested in marketing gives you $2 back then marketing is no longer an expense at all. Got it?
GET INTO THE DETAILS
The Business Chassis puts this all into practice. We all want customers, revenue and profit, yet those are the three least important parts of the chassis. They are results of the important parts, which are Leads, Conversion Rate, Average Dollar Sale (how much each customers pends each time), the Number of Transactions (how many times a customer buys from you) and Margins (really, how well you manage your costs to deliver your product or service).
KNOW YOUR NUMBERS
The quickest way to see the power of the Business Chassis is by putting numbers to it, so let’s assume the business has 4000 leads (per year), converts 1000 into customers (a rate of 25%) and each spends $100 on average twice each year. The formula is Leads x Conversion Rate = Customers, Customers x Average Sale x Number of Transactions = Revenue. Doing the math, that is a Revenue of $200,000. Assuming your margin is 25%, your Profit will be $50,000.
Here is where you take the power and control and ramp up your business. Can you improve your conversion rate by 10% in the next year? How about attracting 10% more leads and then increasing average sales and number of transactions by the same 10%? If you worked really hard, could you find 10% in your costs, or raise prices to increase margins? Are you prepared to put in the learning, the effort and the time investment to make those small increases in each of the five ways that make up the Business Chassis? If you are and you do, the reward will be huge.
10% more Leads is 4400 and 10% more conversion is 27.5% (think about that one…) giving 1210 customers. Go ahead and work on the average dollars and number of transactions and you’ll see it comes to $110 and 2.2 (yes, it is an average). Grab a calculator and work out your new revenue: 1210 x $110 x 2.2 gives you…yes, $292,820. That is a 46% revenue increase in 12 months.
When you add in margin improvement of 10% you get a new margin of 27.5%. Multiply that out. Did you get the same Net Profit I did? $80,525.50. That is a massive 61% increase in net profit, made by using the principle of leverage (in this case, dividing Customers, Revenue and Profit into the really important parts and then developing your and your team’s skills in those).
What would you do with 61% more Net Profit in 12-months’ time? A scholarship for your kid’s education? The dream bach you’ve always wanted? A donation to your favourite charity? The choice is yours. Take action.
You’ve got this!