Five Steps to 61% Higher Profits
“What parent,” he asked, “wouldn’t run into a burning house to save his child?”
It was my mentor describing what he called Save the Baby Syndrome.
“But that doesn’t make good parents,” he continued.
“It’s the little things like regular bedtimes, brushed teeth, homework and curfews that make good parents - and good kids.”
The same is true in business.
It is not chasing the big contract or the elusive, disruptive new product or the national recognition that leads to success. It’s the accumulated result of a few small disciplines practiced every day.
Brad Sugars, the founder and CEO of Action Coach, understood that when he developed the “divide to multiply” concept.
Divide to multiply is a method for dividing big goals into small disciplines that we business owners can practice every day.
The Five Ways
One of the best uses of the concept is method Sugars calls The Five Ways. The Five Ways shows us how to increase profit significantly by making small improvements in five areas that directly impact profit:
Average Number of Transactions
Leads are potential customers for whom we have contact information and who are willing and able to buy what we sell.
Conversion Rate is the percentage of leads we convert into customers.
Average Sale is the average dollar amount of a sale (and, yes, even though we have lots of sales of different amounts, there is always an average.)
Average Number of Transactions is the average number of times a customer buys from us in a period, like a month or a year.
Margins are the difference between our our sale revenue and the cost of goods sold.
We can see in the table below how 100 leads become $12,500 profit. This is how it works in our businesses, whether or not we are aware of it and whether or not we know our numbers.
The table shows that if we begin with 100 leads and convert 25% of them, we’ll have 25 customers.
If each customer spent an average of $2,000 with us once per year, we would earn $50,000 in revenue, and, finally, at a 25% margin, we would wind up with $12,500 profit
61% Higher Profits
Now suppose our business coach tells us: “You need to increase your profit by 61%. Get started on it, and I’ll see you next week.”
Get started on what?
Not much help there, in fact we fire the coach. Our new coach shows us the chart below.
This chart shows us that by making 10% improvements in each of the five areas, our net profit would rise from $12,500 to $20,131, which just so happens to be a 61% increase. We can now go to work on some manageable tasks: getting each factor up by 10%
The first steps toward improvement are always to find starting numbers and to begin tracking changes in each factor.
We have to know our numbers to see our progress, and we have to track changes to learn what works and what doesn’t.
But there is more to knowing our numbers than just information.
The simple act of tracking and sharing our numbers with the team is often sufficient to get 10% improvements because what gets measured gets better.
Strategies for improvement by area
Increasing leads begins with selecting our target markets, understanding what they want and why the buy from us, and tailoring our offers to appeal to them. We then incorporate the offers in great ads written properly with great headlines and calls to action.
That may sound like a lot to learn, but taken a step at time, each is a skill we can learn and master - or that we can hire to be done for us. As the table shows, it's worth it.
One step at a time.
Customer relation management (CRM) software, calling people back, keeping appointments, scripts and sales training are all simple methods that will improve conversion rates.
Asking (Do you want fries with that?), up-selling (Would you like to supersize that?), bundling offers (Would you like the combo meal?), and making sure that every customer knows every product we sell (Would you like to try our new cherry pie dessert?) will increase the average sale amount.
Staying in contact with customers through regular email campaigns, offers such as buyers clubs, VIP specials, special showings will increase the number of transactions.
Strategic price increases and variable cost controls improve efficiency and increase margins.
There are hundreds of strategies available to us to improve each factor. Pick one, get good at it, then pick another and get good at it.
Just getting started
Impressed? After we’ve increased profit by 61%, what then? How about we do it again:
We started with a profit of $12,500 and increased it to $32,419 - a 259% - improvement - by making discrete, incremental improvements to five factors.
All the while, our competitors are rushing into burning buildings chasing higher sales, often without knowing if the sales bring profit with them.
The five ways proves Jim Rohn right- success is a few small disciplines practiced every day.
How about you?
Do you know your numbers? Are you constantly chasing higher sales?
As always, thank you for reading this article. I value your feedback, comments and suggestions for future articles. Please leave your ideas in the comment box below.