When we desire to increase profits, we look at two means. One is to cut costs (click here for details from Part 1) and the other is to increase revenue.

Sales are the lifeblood of most businesses.

The Basic Business Model goes like this:

Leads x conversion = customers x average selling price x number of transactions = revenue x cost percentage = profit 

There are actually only four ways to increase revenue:

• Increase the number of customers
• Increase the average transaction size
• Increase the frequency of transactions per customer.
• Hone your prices.

Let’s discuss each of these.

Increase the number of customers.   We can expand our geographic reach, especially now due to the benefits of technology.  We can increase sales incentives for your sale team – reps and sales partners for new customers.  The incentives can be temporary for a short-term boost or longer term with a revised commission structure.  (Just be careful with longer-term commission structures. Once you give something to someone it’s hard to take it back.)

Also, capped or declining commission plans may need to be changed.  These can be unconsciously unmotivating and incentivize sandbagging and pushing sales out.  I prefer “big carrots.”  For example, instead of a decreasing commission percentage as sales volume goes up which seems like the typical model I see (10% for the first 100K, 8% for the next 100K, 7% for the next 100k), consider reversing it (10% for the first 100%, 12% for the next 100K, 15% for the next 100K).  Pay a higher commission to the higher producers.

Increase the average transaction size.   This is best done by sweetening the pot.  Help the customer want more of your product or that a higher level of your service is the wise, logical choice for them.  For example, add bonuses, additional products, and services to existing products to sell at a premium rate.  Bundle related products to incentivize a larger purchase.  Improve marketing so the customer sees all the features in your product that will solve a problem or ease a pain-point for them.

Increase the frequency of transactions per customer.  Simply put, make buying easier.  How difficult is your purchasing process? If your online shopping cart is hard to navigate, customers won’t come back. Run regular tests of how simple or difficult it is to make a purchase from your company whether in person or online.

Hone your prices. Increase or lower pricing based on research, trends, and customer feedback.  If you charge too little, the perceived value goes down. If you charge too much, you’ll turn away customers.

Take some time to consider these changes to increase your bottom line.

Why do people think profit is a dirty word?  I love the book Profits Aren’t Everything, They’re the Only Thing by George Cloutier.  George, who I met several years ago at his summer home in Nantucket, discusses why profits are such an important component of any business.

As business owners, we have tons of challenges:

• Motivating the team (keeping all oars rowing in the same direction)
• Taking care of customers
• Forecasting production to meet anticipated customer needs
• Marketing our products
• Administrating a myriad of daily details like answering email, returning phone calls, and keeping paperwork up to date.

ALL of the above factors contribute to the “bottom line,” or profit.

And despite the hesitancy about the word, (“All those companies are just out for profit!”), profit is actually a GOOD thing. Profit is necessary for your business to be able to hire the best employees, develop effective marketing strategies, provide excellent customer service, and serve people for years to come, including making donations and helping to fund community service projects that align with your values.  In reality, when you drop prices to satisfy a few customers (or even one) you’re hurting other customers, your employees, yourself, and those you could potentially give to.

Most businesses I see don’t have profit as a forefront objective.  They seem to be in business for another reason. If that’s you, I suggest you re-think your opinion of profit.

Some businesses already realize that profit is beneficial. Maybe that’s you, and you want to increase profits. There are really only two ways to do so.

Increase revenue, or reduce costs.

That’s it.

The main role of a business owner and/or the company CFO is to be looking for ways to do one of those two things (or both.)

With cost-cutting, if it’s up to you alone, I recommend cutting and asking questions later. Rip the bandage off. I’ve made the mistake of overanalyzing cost reduction numerous times.  Your first instinct is usually your best. It’s proven that snap decisions are often as good as decisions that you took a long time to agonize over.

If you have to get group consensus, make sure you get the right group together. Gather as much data as you reasonably need, but don’t overdo it. Let everyone contribute their thoughts. Then, make a decision.

Be relentless with cost-cutting. Go through each line item. No item is too small.  Looking at the smaller costs helps breed a cost-conscious culture. Ask questions like,

• Do we really need to be paying every employee’s full cell phone bill? (In the early days, when people had a private landline or cell phone, businesses would feel the need to provide a separate phone for business use, or reimburse employees for cell phone use for work. Now, there’s very little distinction and even kids have their own cell phones.  It’s become a personal choice and expense to have one. Most people would keep their cell phone even if they left your employment. So is it truly up to you to pay for one now?)
• Do we need to continue using that vendor? Are there others that are more cost-effective?  Your suppliers are often the easiest place to reduce costs. Ask for more discounts or better pricing and terms.
• What other perks are not completely necessary? I know of one company that provided coffee and soda for their office employees, without charge. While I don’t have a problem with some break room supplies, was it necessary (and arguably, even healthy?) to provide an unlimited supply of soda to the employees?

I know these are hard questions. And I’m not trying to be a mean guy.  Cost savings can be used for a better purpose, like employee training, increased salaries, improved marketing and growth–and maybe even–bonuses?  Ask your employees if they would be willing to give up cell phone reimbursement for the chance to have a bigger raise or increased bonus potential. You may be surprised by what they say!

Next time, I’ll share some thoughts about increasing revenue.

As of today…is your business growing, or dying? (This technically applies to our personal lives, too.)  Dying doesn’t sound good to me. I’d rather be growing.  That’s why I focus on constantly growing and getting better at what I do in every aspect of my life.

I teach the same to my clients. In some cases, clients need to do an about-face to get their organization back in the “growing” rather than “dying” category. (See this Journal of Corporate Renewal article where I was part of a round table discussing a business turnaround for an example.)

I remember talking with one of my clients about growing his $50mm energy services company.  These guys process about 14,000 invoices per month with an average invoice ticket of approximately $300. How would a company like this continue to grow?

The only way to grow any business is to grow the number of customers, increase the average sales value, and/or increase the frequency of customer purchase.  That’s it.

The key is to focus on improving each component.

I have used this simple formula with many types of companies including medical practices, construction companies, HVAC companies, truck parts distributors, job shop manufacturers, and technology resellers.  It’s a simple formula and it works.

Once you understand the power of this, it will help really grow your business.

Consider the following formula.

Number of customers x Average sale price x Frequency of purchase per year = Revenue

I put together a program for one of my client’s segment and had some amazing results.

Notice the geometric growth – a 22% increase in number of customers and 14% increase in average sales with small increase in frequency of purchase gives a 50% increase in revenue.

For the energy service company I was speaking to, we outlined a small increase in the number of customers 7% based on current growth trends and an additional service offering to increase the ASP $100 as follows:

I suggest you look back at the prior 12 months of sales and get your actual numbers.  Don’t make assumptions here.  Most business owners I talk to make assumptions as to the number of customers they have and ASP, but when we get the actual numbers, their assumptions invariably are wrong.  Dump your invoice register to excel.  De-dup the customers or compare to sales by customer.  I also like to calculate average invoice value (total sales divided by total number of invoices).  This may be be an easier stat for your sales reps to focus on.

TIP – I love the simple trick in Excel to de-dup a list (data menu, remove duplicates), then use the sumif formula to get totals.  I use this trick all the time.

Once you have your actual historical data, develop creative strategies and ideas to increase each element of the growth formula.  Then EXECUTE a couple strategies and measure the results.  Optimize, then repeat; test and measure.

It’s the only way to grow your business.  Customers x ASP x purchase frequency = revenue.

Profit is not a bad word.

You don’t want to be greedy, and you want your business to operate on values that go beyond money.  But if you don’t MAKE money, you aren’t really in business.

So let’s make profit is a fun word instead.

As defined by Investopedia, Profit is a financial benefit that is realized when the amount of revenue gained from a business activity exceeds the expenses, costs and taxes needed to sustain the activity. Any profit that is gained goes to the business’s owners, who may or may not decide to spend it on the business.

Profit is a reward for risk taken in the business.  Business is the wealth creating institution of society.

But many companies and CEOs I work with make the mistake of not focusing on profit.

My friend Bob Thies sent me the book Profits aren’t Everything, They’re the Only Thing by George Cloutier when I first started my consulting practice over 10 years ago.  This book changed my thinking, and it is one of my most gifted books.

At first, the author comes off like a hard-ass, with chapters titled, Love your business more than your family or It’s not economy stupid, it’s you, but his points are valid.  I later met George on Nantucket. He really isn’t a bad guy, but he believes these things.  We discussed his process to address troubled-company turnarounds which helped me create the turnaround framework I use today.

I have worked with hundreds of companies over the last 10+ years in my consulting firm.  Some companies I work with do very well and just need financial expertise on their team, but many of the companies that hire me are losing money and are having huge cash flow problems.  These companies didn’t focus on profit and let things get out of control.  These situations need immediate action.  Once you dig yourself into a hole with big losses and eroding retained earnings on your balance sheet, it’s hard to dig out.

The key is profit.

To be more profitable business owners must think profit in every decision they make with respect to customers (or patients in the medical world), product pricing, employees, vendors, etc. Owners need to understand the business complete cost structure; they need to think activity based costing (i.e. all costs – cost of sales expenses and all selling, general and administrative expenses relate back to product costing/segment costing/practice area costing).  CEO’s need to evaluate their customer profitability, vendor profitability, and employee profitability.  They may have to make huge personal sacrifices like missing the kids game or not taking vacation, and make difficult decisions that affect employees lives.  I’m not saying this should be a lifestyle, but there may be times it is necessary.

If your business is unprofitable, unless you’ve saved cash reserves when things were good, the problem need to be addressed ASAP.  The answers are generally apparent, although the solutions may not be.  We sometimes think, “Just sell more.”  It doesn’t always work that way.  Don’t bury your head.  I have done that, and it never works out.  Develop an overall operating plan, look at your cost structure and customer profitability and focus on hitting the numbers; live and die by the plan.  If you miss the numbers, re-adjust until you hit your targets–the most important of which should be PROFIT.

I can help you increase profits. Contact me.