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When talking to clients, I’m often asked about ways in which to increase profits. A lot of business owners simply look at two factors; one being increasing sales and the second being reducing costs. I suggest that there are actually five areas to focus on when looking to increase profit and these are:
Below is an example of how this would flow through in a business in which in a year they have 2,000 leads with a 20% conversion rate to customers. The business also has an average sales price of £300 and it is expected that on average a customer will purchase twice a year and from this the business will achieve a gross margin of 20%.
2,000 leads x 20% conversion rate = 400 customers
400 customers x £300 x 2 purchases a year = £240,000 turnover
£240,000 x 20% gross margin = £48,000 profit
So what would be the impact on the business if we looked to increase the five factors above by 10%? A 10% increase in profits? No, the actual increase would result in a 61% increase in profits, take a look below.
2,200 leads x 22% conversion rate = 484 customers
484 customers x £330 x 2.2 purchases a year = £351,384 turnover
£351,384 x 22% gross margin = £77,304 profit
The reason for this is that each 10% change has a compound affect on profit and can have a huge impact. If you swap 10% for 20%, this would lead to a 149% increase in profits. Whilst this is not necessarily an easy task it is one that every business should sit down and see what strategies they could implement under each category to move their numbers.
If you would like to talk about how you can grow your business please do get in touch.
Grant Smith, Partner
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