Business Consulting | Let’s Play With Profit Margins

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How A Business Consultant
Can Dramatically Grow Your Business

If there is one thing I have found that business owners don’t understand, it is how incremental increases in business dynamics can lead to HUGE increases in revenues and profits.

Let’s play a game with profit margins. To do that, we will make some simple assumptions to start.

Here is what we’ll play with, to make it easy.

We will explore the following areas:

• Leads
• Conversion Ratio
• # Customers
• Annual Transactions
• Transaction Value
• Total Revenue
• Profit Margin
• Profit

Let’s say that the following numbers fill in the blanks.

• Your advertising campaign has brought in 1,000 leads, your conversion ratio is 20% resulting in 200 customers.

• You know from your current customer data base that your average customer makes 4 transactions per year averaging $100 per transaction, resulting in $80,000 in gross revenue at a profit margin of 50% giving you a gross profit of $40,000.

Got all that?

Let’s lay it out here.

• Leads: 1,000
• Conversion Ratio: 20%
• # Customers: 200
• Annual Transactions: 4
• Transaction Value: $100
• TotalRevenue: $80,000 (4 X $100 X 200)
• ProfitMargin: 50%
• GrossProfit: $40,000

Now look what happens with just a 10% increase across the board.

• Leads: 1,100
• Conversion Ratio: 22%
• # Customers: 220
• Annual Transactions: 4.4
• Transaction Value: $110
• Total Revenue: $106,480 (4.4 X $110 X 220)
• Profit Margin: 55%
• Gross Profit: $58,564

This illustrates how incrementally small changes can have an incredibly huge impact on your bottom line.

Let’s take a look.

By merely increasing these key factors by 10% you have increased your gross profits by a WHOPPING 46%.

Let’s look at how YOU might do this for your business.

1. You make your marketing and advertising more effective by using laser targeted methods that are trackable and quantifiable thereby increasing the number of leads.
2. You fine tune your conversion techniques and by just raising it from 20% to 22% your customers grow to 220.
3. You utilize a direct response marketing system that automatically stays in touch with your customers raising the annual number of times your customers buy from you to 4.4 times per year.

Through incremental price increases, you have raised your gross revenues to over $106,000.

And finally, with that incremental increase in profit margin, you make almost $19,000 more dollars from the same amount of work increasing your gross profit by that HUGE 46% number.

The moral of this story?

Do not underestimate the value of incremental increases in your business model and the bonanza that can be awaiting you at the gross profit line in your profit and loss statement.

And finally, these results are not difficult to achieve. I have found that most business people simply are not aware of the power of incremental differences in achieving results and what these can mean to the bottom line. This is why you need a business consultant – they can become the most highly valued asset you will ever have in your company.

A Business Consultant’s understanding of these numbers, but even more importantly, their ideas to implement these changes, more than pay for your cost of making them a working partner for the life of your business.

To Your Success!

MichaelB

Related Post: Business Consulting | Why You Need A Business Consultant

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