Planning For Profits



Planning for Profits - The 10 Keys to Profitability

By Karen L. Paiyo - Australian Small Business Counsellor

Karen Paiyo Small Business Consulting

Whether or not a business is profitable largely depends on whether the business owners are planning to be profitable. I know that, in a general sense, every business owner dreams their business is going to be a huge success. In this dream they have money raining down on their heads from the sales of their goods and services. Surprisingly, sales success alone does not guarantee profitability. Profitability requires a consistent focus on continuous improvement and diligence in monitoring the key performance areas that impact profit.

1. Having a Shared Business Vision

Given that profitability is a measure relying heavily on number crunching, it might seem a tad strange that we start with something that could be considered as subjective. However, studies have shown that companies that have created a shared vision that resonates with each of its stakeholders are more likely to experience exponential rather than incremental growth.

If you doubt the power of creating a shared vision, take a look at the results of a four year study by Professors John Kotter and James Heskett examining10 businesses in each of 20 industry categories.

This study showed that businesses with a shared vision experienced revenue increases of 682% on average, while those without a shared vision only experienced 166% growth. When it comes to work force increases. those with a shared vision experienced 282% growth while those without experienced 36% growth. Stock prices for companies with a shared vision went up by 901% on average, compared to only 74%. Net income for those with a share business vision increased by a whopping 756% compared to a paltry 1% for those without. Which would you rather?

2. Increasing Your Exposure to Your Target Customers

Increasing your exposure has several important elements. They generally fall under the marketing umbrella of your business, but when specifically applied to generating profits these specific elements come into much sharper focus.

a.Defining exactly who your customers are and what drives them

Mass marketing is expensive and response rates typically range from 0 to 4%. Narrowing your target segment, to those more likely to buy your product or service, reduces the marketing costs. Identifying your target segments characteristics and buying behaviours means you can craft marketing campaigns that directly appeal to the segment resulting in increased response rates.

b.Know where your customers congregate in large numbers

Directing your target marketing efforts to where your clients are likely to congregate in large numbers increases your chances of achieving success with your marketing campaigns, thus increasing your sales revenue.

c. Maintain regular, meaningful contact with your clients

Meaningful communication is the key word here. Continual sales blasts will achieve little and possibly alienate your client. What you are aiming for here is to provide information that the client will value so that a degree of trust is built which can be leveraged in later sales campaigns.

3. Increasing Your Customer Numbers

Sales is a numbers game. The more interested customers you have to market your products and services to the better your sales results will be. Do everything possible to increase your customernumbers - and the amount of information you have about them. The more information you have about our clients gives you an increased ability to profile your customer base. This allows you to make more informed decisions when developing your marketing campaigns.

Typical ways to increase customer numbers include free newsletter subscriptions, competitions, cash-back offers, free event registrations, etc. Increasingly, businesses with large, active databases are more attractive to those looking to acquire businesses, thereby improving the value of the business itself.

4. Increasing Your Sales Conversion Rates

This focus area is vital. Your aim is to make every possible sales opportunity a winner. Studying customer characteristics and buying behaviours; becoming aware of consumer trends; and applying customer feedback to improving your business, will all combine to help improve your sales conversion rates. Continue to work to make it as easy as possible for the customer to do business with you.

5. Increasing Frequency of Customer Purchases

The more often your customer purchases from you the better your sales revenue. With every purchase, try to lock in the next purchase opportunity and introduce marketing campaigns to encourage a shorter sales cycle.

6. Increasing the Order Value of Each Customer Purchase

At every sale work hard to cross-sell and up-sell to your customers. The perfect example of this is that famous McDonalds catch-cry "Would you like fries with that?"

For example, if you are selling iPods, you may want to ask your client if they would like any additional accessories, such as a charger or protective cover. Or you may want to ask them about their usage and offer them an iPod with greater capacity. Better still, try to do both! The more you can increase the average order value, the better your sales revenue.

7. Reducing the Cost of Goods Sold

Reducing the cost of goods sold, while maintaining existing pricing, increases your profit margin on each product sold. If you are in a retail situation, this could be as simple as picking up the phone and talking to your suppliers to renegotiate your reseller rates. In a manufacturing situation, look at each component in the manufacturing process and work to reduce the cost of each item or make the process more efficient. (Try to maintain or improve quality, not reduce it). Service providers could look at improving efficiencies in the service delivery, thereby reducing the cost of the service.

8. Reducing Operating Expenses

Work to keep the cost of doing business as lean as possible. The more overheads you add to operating our business, the less profit you derive. One simple way to do this is to make it a habit to regularly review your suppliers. This includes communications providers, insurances, electricity, advertising, etc. Also try looking to technology to help reduce your expenses and increase your efficiency. For example, a bricks and mortar business may benefit by transitioning their business processes to online functions.

9. Pricing Your Products and Services for Profit

In my experience, this is where many of my clients get it horribly wrong. Their pricing structure is based on what their competitiors are offering or on what they think that customers will pay for their products and services. Or worse, they discount their rates based on competitor pricing. Pricing products requires a bit of thought, but at the very least it should factor in all the costs involved in the delivery of the product of service. Most importantly, products should be priced with a degree of profit included.

10. Being Aware of your business environment and adapting

Being aware of your business environment and changing consumer demands and continually feeding this information into your business is very important. Acting upon this information means that your business will be able to profit from current consumer trends and, by adapting to change, your business is more likely to survive and thrive.

ABOUT THE AUTHOR

Karen Paiyo Small Business ConsultingKaren L. Paiyo is an Australian Small Business Counsellor, supporting and nurturing the spirit of entrepreneurship in the Asia Pacific Region. Karen empowers small business owners by transferring to them the skills and expertise needed to help them take their business ideas from creative concept to profitable reality, faster and with less risk.

For more small business articles, news, tips and business advice, check out her website at http://www.karenpaiyo.com