Most entrepreneurial business owners want to grow their business, make more sales and generate more profit. It’s why they started the business in the first place.
But in their eagerness to make more profit and earn more, too many business owners make a fundamental mistake, which I see all too often. They assume the answer is to make more sales.
But in a fascinating interview last week with the f-word Academy, Robert Craven explained that this is the answer only if your financial model already works, meaning that you are making the most profit you can on what you sell.
As he explained, if your financial model is broken – or perhaps not optimised – then selling more will mean that you end up just leaving more profit on the table.
I see too many businesses focussed on selling more – thinking this will solve their problems – instead of focussing on profitability.
The solution is to fix your financial model first. Here’s how:
Develop a price discrimination strategy
Four out of five businesses are undercharging, discounting to make a sale or charging every customer the same price irrespective of the value they deliver. In most cases the solution is just to put their prices up, which is a good place to start.
But there are a variety of other pricing strategies you can employ; customers value certainty and choice but how often do you offer a premium service or your best quality to the people who are happy to pay more?
Think about how hotels and airline price. Why should every customer pay the same price for the same product or service? I recently booked a hotel room and was offered three different prices for exactly the same room dependent on my payment choices.
Decrease your costs
When did you last carry out a thorough review of your cost base to ensure that you are getting the best value from every supplier? How many ‘new’ suppliers have entered your business sector with innovative solutions you could use?
As a test go to a selection of your suppliers and ask if they can give you a better price. We already know that most businesses will offer a discount if asked (just ask any Sky TV subscriber) so you’re sure to make savings which will go straight to your bottom line.
Get rid of your underperformers
We all have them, customers or clients that are under-paying, cause us the most problems and never pay on time. Can you educate them? If not sack them.
The same applies to your underperforming suppliers. Sack them too. And what about underperforming staff – train them, educate them but if they continue to underperform get rid of them.
And don’t forget your distribution systems: are they all as efficient as they once were? Should you be moving online or ditching some of your underperforming re-sellers?
And now take a look at your products and services. When was the last time you ditched or outsourced an underperformer? I offer several services in my accountancy business that I outsource to specialists such as bookkeepers, payroll providers, R&D tax credit experts and so on. It’s a win-win-win and yet how many business owners hang on to products and services
they should have moved on from.
The reality is that we all have under-performers in our businesses. Root them out.
Now, WHEN you have fixed your financial model and your business is making a sensible level of gross and net profit THEN hit the marketing button and start to grow your turnover. It will pay massive dividends (literally)!
To your success
Noel Guilford
PS If you’d like a copy of my whitepaper How to price your services effectively please drop me a line.