Many business owners we speak to work really hard to improve profit performance but are missing an opportunity to make significant gains to this bottom line by leveraging 5 often overlooked inputs.
Here we share a simple concept with the potential to compound your profit by up to 61% with just a 10% increase in 5 specific areas using the ActionCOACH 5 Ways Model.
The Standard Profit Model:
Normally we look at profit development from the standpoint of three variables; sales, expenses and profits. This can be defined by the formula:
Sales – Expenses = Profits
In this approach, each variable depends on the other, so normally businesses look at either increasing sales or decreasing expenses in order to improve profitability.
The ActionCOACH 5 Ways Profit Model:
The ActionCOACH 5 Ways model expands upon this narrow view and breaks the sales variable into five separate components.
You can then work on these variables individually to leverage profits on the bottom line using the “Divide to Multiply” principle.
According to the “5 Ways” model, all business is driven by five key profit generating areas:
Average Number of Transactions
These 5 areas make up the profit-generating equations. Increasing any of these variables can increase your sales and profits while keeping expenses constant.
As you can see, customers, revenue and profit are the “outputs” or results in this formula.
Leads, Conversion Rate, Average Sale, Number of Transactions and Profit Margin are the “inputs” that drive these “outputs”.
So, if you want to change the outputs in the formula, you simply change the inputs.
The great strength of the 5 Ways Model lies in it´s compounding effect. So, if we increase both the number of leads AND the conversion rate, one multiplies the other! With a compounding formula, small improvements to each part of the formula can improve your results in a dramatic way.
5 Ways to change your inputs
In today’s highly competitive business world, we want more Customers, more Revenues, and more Profits. However, as we have seen with the 5 ways model, these are outputs … products of what we put in.
Understanding the 5 key inputs, and knowing how to test and measure everything, is critical in driving your profits, revenues and customers effectively.
Leads are generated from an effective sales and marketing system. This is the vital activity that creates potential buyers, or ‘prospects,’ the lifeblood of your business.
The challenge is knowing which marketing strategies are working! A solid “Test and Measure” system is critical to evaluate where your resources are best deployed.
Some confuse responses, or the number of potential buyers, with results. The sound of ringing phones does not mean that the cash registers are ringing.
A conversion rate is the percentage of people that actually bought versus those who could have bought. For example, if 10 people walk into a store and 3 buy something then the conversion rate is 3 out of 10, or 30%.
Here is where the strength of your Sales Team is tested… without a robust Sales System, your lead generation efforts are not being leveraged.
Number of Transactions:
An average number of transactions is the number of purchases the average customer will make over a year. Developing repeat customers is a great way to cost-effectively increase your profits.
Many business owners make the mistake of subscribing to the myth of once a customer, always a customer – not true. Successful businesses have effective ways to ensure they keep coming back.
Average sale is the average amount spent by the average customer with each purchase. Up-selling and Cross-selling products that are of value to the customer at the point of sale will really help to increase your revenues.
Think of how many times you have been asked “Would you like to go large?”, and how many times have you spent slightly more than you initially intended?
Having consistent up-selling or cross-selling tactics in place will make a huge difference in profits.
Simply put, if a business sells something for £100, and £25 was profit, the profit margin is 25%. The margin is the profit percentage of each and every sale.
It is vital to know Profit Margins for each product or service you sell; this way you can ensure you are maximising sales of your most profitable lines and minimising time and resources selling low-profit margin lines.
Using the 5 Ways to Maximise Your Profits:
Of course, this is just the beginning of identifying where improvements could be made.
There are five variables in this formula and each input is effected by a whole range of factors. For example;
As always, ActionCOACH is on hand with a collection of tried and tested strategies to improve performance in each of these 5 ways Model inputs.
In the meantime, feel free to have a look at our other resources and blog posts for answers and ideas to solve common business problems.