5 Ways To Dramatically Improve Your Business Profitability

By Pinyo, on July 13, 2009

Many businesses are suffering as this recession prolongs. As a business owner, you may be looking for ways to improve your cash flow and ultimately the profitability of your business. Unfortunately, many people stop short at the income versus expenses equation and never dig deeper — resulting in missed opportunities. In this article, I will show you five small ideas, that when you added together could provide you with a significant result.

Can You Double The Profitability Of Your Business?

If I ask you whether or not it’s possible to double your profit, most of you will answer NO — especially not in this economy. However, I want to show you some plausible numbers for a theoretical business (see below), and demonstrate how little things do add up to help you achieve the big result you’re looking for.

Here is the table with some monthly data:

Here’s a copy of the table in Google Docs Spreadsheet so you can plug in your own numbers.

The table above simply demonstrate how a theoretical business could double its monthly profit by making 15-20% improvement in 5 business areas: Leads, Conversion Rate, Returning Customers, Revenue per Customer, and Cost.

Isn’t that amazing?

Do you believe that you can improve these 5 factors within your business by 15-20% each?

1. Leads

Every business, whether traditional or online, needs a steady stream of potential customers. This involves expanding your reach and increasing interests in products and services you have to offer. How can you expand your reach and increase interests? Some ideas include:

• Offer something for FREE
• Offer toll-free number where they can call 24/7
• Leveraging different mediums — e.g., print, TV, radio, online, etc.
• Broadening your geographic market
• Expanding your distribution channels. If you can’t expand on your own, look for people who will help you sell your products and services for a fee.

Basically, do what it takes to gain more mind share and interests.

In the example above, we increased the number of leads per month by 20% from 4,000 to 4,800.

2. Conversion Rate

Now that you’ve got their attention, you have to turn them from a potential customer to a paying customer. What can you do to improve your conversion rate? Some ideas include:

• More effective sales and marketing techniques
• Better store arrangement (or web site layout) to make products / services more appealing. Do you know that supermarkets put more profitable products at eye level?
• Offer money back satisfaction guarantee
• Remove barriers — e.g., streamline your sale process, make it easier for them to pay you, etc.

In the example above, we increased the conversion rate by 15% from 50% to 57.5%. This results in total new customers of 2,000 versus 2,760 — a cumulative improvement of 38%.

3. Returning Customers

It’s proven that it costs businesses less to sell to their existing customers than to new ones. What can you do to sell more to your existing customers? Well, the most important thing is to deliver what you promised the first time. If you pissed them off the first time, they won’t buy from you again — simple, right?

Here are some more ideas to sell more to your existing customers:

• Start a mailing list so you can tell them about new offers and remind them that you exist
• Make your services subscription-based so you can continue charging monthly or annually
• Make sure they are happy the first time — yes, this one is worth repeating!

In the example above, we increased the returning by 20% from 250 to 300. This results in total paying customers of 2,250 versus 3,060 — a cumulative improvement of 36%.

4. Revenue Per Customer

Now that you’ve increased the number of paying customers, let’s focus on earning more from each one. If you have a restaurant business, you’ll know this factor well. This is one reason why waiters and waitresses tells you about the specials first, then take order for drinks, appetizers, entrees, and desserts in rounds. Since restaurants capacities are limited, one of the best ways for them to increase revenue is by increasing sales per customer.

What can you do to increase sale? There are many tactics, for example:

• Add value to your products or services so you can charge more
• Create premium products or services to cater to customers who want to spend more
• Offer buy 1 get, 2nd for 50% off specials
• Offer bulk discount specials

In the example above, we increased the revenue per customer by 15% from $100 to $115. This results in total revenue of $225,000 versus $351,900 — a cumulative improvement of 56%.

5. Costs

Now that you improved your revenue, make sure you don’t forget your expenses. Controlling your expenses is an important part of the equation, and a small change can dramatically affect your overall profitability.

What can you do to reduce your costs? Here are some ideas:

• Streamline your products and services so you’re focusing on the most profitable parts of your business
• Outsource non-critical portions of your business
• Negotiate with your vendors and supplies for better rates
• Reduce your inventory

In the example above, we reduced the expenses by 15% from 65% of revenue to55.25%. This results in net profit of $78,750 versus $157,475 — a cumulative improvement of 100%. You just doubled your profit!

Of course, this is just a theoretical business and yours will be vastly different from this. However, your business too has these 5 factors. And you can also make small improvements in these areas will net you big improvement to your top and bottom line. More importantly, you can repeat the same process again and again to keep growing your business. Give it a try!

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Pinyo is the brain behind Moolanomy personal finance blog and a few other web sites. If you like this article, please subscribe for free daily email updates.

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