To most business owners, business growth equates to more sales and more profits. However, this is concentrating on the results and not on the factors that you can actually influence to achieve those results. What do we mean? Well, consider these formulae:
No. leads x Conversion rate (%) = No. customers
No. customers x No. transactions x Average transaction value (£) = Sales (£)
Sales (£) x Margin (%) = Profit (£)
So the three things that business owners want – more customers, more sales and more profit – are actually the results of the 5 factors highted in red in the formulae above! So you need to be concentrating on these 5 ways to grow your business profits, and just a small improvement in each of these 5 aspects of your business performance will lead to a huge growth in your bottom line profits.
So taking each factor in turn:
This is the total number of potential buyers that you have contacted or that have contacted you. The number of leads can be increased using your marketing strategies and materials. This is the most expensive of the 5 ways to implement, so we would always recommend that you concentrate on the other 4 ways first.
2. Conversion rate
This is the percentage of the people that contact you who actually buy from you. For example, if 10 people contacted you and only 3 of them bought from you, your conversion rate would be 30%. Do you know what your conversion rate is? Increasing your sales conversion rate is a great starting place to improve your business.
3. Number of transactions
This is the number of times your customers buy from you. On average, it is 6 times cheaper to sell to an existing customer than it is to sell to a new one. You have already built up trust and delivered great service, so you just need to make sure when your customers want to buy again, they come to you first.
4. Average transaction value
This is the amount that each customer spends with you each time they buy. Again, it is easier to get existing customers to spend more than to get new ones to buy for the first time. Remember people buy based on perceived value, not price. If you give good value, you can charge more.
Keeping a close eye on your costs is paramount in any organisation. Knowing what products and services are most profitable, keeping overheads to a minimum and testing and measuring will make you a lean and mean business. This is the cheapest and easiest of the 5 ways to implement and should always be started first.
Watch this short video to see how the 5 ways works in practice!
By simply increasing each of these 5 contributory factors by just 10%, you can increase your bottom line profit by 61%. What could you do with an extra 61% profit next year?