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African startup advice series: a formula for profit

By , ITWeb
Africa , 21 Jan 2015

African startup advice series: a formula for profit

It's the beginning of a new year and most businesses are no doubt looking for ways to improve their businesses and increase profits for the year.

Conventional business looks at profit as total sales minus the expenses. This means if you want to increase profits, you either need to increase sales or decrease expenses.

This narrow view was thrown out of the window by Brad Sugars, founder of the global ActionCOACH Business Coaching Franchise and author of the Instant series of business books. He believes profits can be positively influenced by five separate variables, while expenses are kept constant.

The five key profit generating areas are: Lead Generation; Conversion Rate; Average Sale; Average Number of Transactions; and Profit Margins. These variables are reflected in the following formula:

Number of Leads X Conversion Rate = Number of Customers

Number of Customers X Number of Transactions X Average Sale Value = Revenue

Revenue X Profit Margins = PROFITS

Sugars has shown that if you increase each of these five variables by a mere 10%, you can increase your profits by 61%!

The premise behind the model is that every business has 3 key objectives:

• To increase customers

• To increase turnover

• To increase profits

To increase your number of customers, you have to either increase your number of leads or your conversion rate, or both.

The number of leads is defined as the total number of potential buyers that a particular business contacted or that contacted the business last year. Leads are also known as "prospects". Referrals and word of mouth are the most common strategies used by small businesses, but by putting a lead generation strategy in place, business owners will increase the number of prospective clients that would consider doing business them. Think of strategic alliances, advertising, email or social media campaigns, barters, directories, shows, brochures, cold calling, telesales, etc.

Now don't confuse your prospects with buyers... just because your phone is ringing doesn't mean the till is ringing. You need to determine your conversion rate, or the percentage of people that actually bought versus those who could have bought. Too often I find clients who drop the ball and lose potential clients because they don't get to them in time. Map your sales process and work on the areas that increase your odds of converting prospects into paying clients. Offer free samples, trial periods, make it easy to buy, train your sales people, educate on value not price and talk to the benefits rather than the features.

To increase your turnover, you need to focus on increasing the number of times a customer buys from you and the average amount they spend with you each time.

The average number of transactions is the number of purchases the average customer will make over the course of a year. Implement strategies to increase the number of transactions from each customer by offering loyalty rewards systems, scheduling follow up appointments, put your contact details on the products you sell, keep in contact with your clients, offer specials and service that gives customers a reason to return.

Then you also need to determine the average value per transaction. The simplest way to increase the average value per transaction is to increase your prices. When last did you increase your prices? What are your competitors charging? Alternatively, up-sell, cross-sell, create package deals, encourage impulse buys and stop discounting!

Finally, to increase your profit, you need to increase the profit margin – the profit percentage of each and every sale. You can increase your profit margin by systemising the business, outsourcing or employing people in-house as appropriate, work from home, buy direct or change suppliers, only sell fast moving stock or sell products online.

There are endless strategies to improve these five key areas, and often just by focusing on one of them, and by testing and measuring all strategies, they improve.

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