Reinvent company by revising business model to improve profit margins

All successful companies operate according to a business model that can be broken down into four elements: a customer value proposition that fulfils an important job for the customer in a better way than competitors’ offerings do; a profit formula that lays out how the company makes money delivering the value proposition; and the key resources and key processes needed to deliver that proposition.
In this article, we concentrate on the second element – the profit model strategy. 

Here are five concrete tips to help you improve your profit margins over the long term:
Velocity matters. The faster your turnaround time (from order to delivery), the lower your overhead cost per unit produced. This in turn means improved profit margins. So go back to your main systems from order to delivery, how can you speed up the process? Are there steps you can eliminate? Ways to shorten parts of the process? Can you automate, template or pre-do steps? Can you script out your linkages between people and departments to speed up the process.

Remember, the faster you make the cycle, the better your margins will be, all things being equal.
Upsell and cross-sell. For those who are not aware of the meaning of these two terms: upsell means to persuade a customer to buy more than originally intended and cross-sell means to sell (a different product or service) to an existing customer. Both methods will increase your average unit of sale. In general, when you increase the amount you sell to your customer at one time, you’ll improve your margins because you’ll be increasing the purchase velocity and therefore lowering your cost per sale in terms of overhead burden. So how can you increase your average unit of sale per customer? Can you upsell to richer offerings? Can you offer larger units of purchase? Can you cross-sell complimentary products or services?

All of this allows you to amortize your marketing cost over a larger unit of sale which dilutes your marketing cost for each sale and hence grows your profit margin.
Cut low-margin clients, products or services. Do this and invest the saved time and money in higher-profitable products of your business. This presupposes that you have accurate and timely reporting that shows you which customers, products or services produce what margins. Assuming that you do, review a ‘margin analysis’ of your key products, services or customers to see which are most and 
least profitable.

Retention, retention, retention. Do all you can to keep your customers actively purchasing from you. Study the most common ‘drop points’ in your client’s purchase history. Can you strategically reinforce your business system to reduce that attrition? Perhaps you need to communicate with them how to use your product or service? Or give them a well-timed ‘gift’ or make a well-timed visit or phone call?
Courting your current customers eliminates or greatly reduces the acquisition or marketing cost on that second and all later transactions.
Watch out for internal problems. Is it a quality issue on the product? Are you poor at forecasting and keep too much supply on hand for an order? Does it take you too long to sell your inventory and you lose part of it to obsolescence? This can also be an issue in areas of your business outside of operations, for example, buying leads that your sales team can’t or doesn’t follow up with. Investing in marketing that 
doesn’t work.
 

Another strategy
There is another way of looking at the profit revision. It is common knowledge that financial success in any business is that you cannot increase profits directly, only indirectly. You cannot just say that you are going to increase profits of your business without some specific strategy.
The only thing that you can do to increase profits is to improve the variables that ultimately determine your level of profitability. When you improve few variables about your business you will increase profits and affect your bottom line.
 

Increase lead generation
The process that you use to attract interested prospects to your business. If five out of 10 prospects that come into your place of business end up buying from you and you can increase the number of people coming in from 10 to 15, you can make more money and increase profits by 50 percent.
 

Improve lead conversion
The process by which you convert leads into paying customers. This is the measure of the effectiveness of your sales efforts. If you can increase your conversion rate from one out of 10 to two out of 10, you can double your sales and increase profits.

Improving your ability to sell and convert interested prospects into paying customers is one of the most important things you can do. And there is no replacement for ongoing sales training, both for you and for every single person who speaks to customers, either live or on 
the phone.

Look at every key result area in your sales process and seek ways to improve a little bit in each area. A small improvement in each key area can lead to an enormous improvement in overall sales results.
 

Increase number of transactions
The number of individual sales that you make to each customer that you acquire. By increasing the frequency of purchase by 10 percent, you increase your sales and increase profits by the same percentage. What are some things that you could do to get your customers to buy more from you and to buy more frequently?
 

Increase size of transaction
The size of the sale and the profit that you earn from each. You should be continually looking for ways to up-sell each customer so that he or she buys more each time.
 

Reduce cost of customer acquisition
The amount that you have to pay to acquire each paying customer. You should be continually seeking creative ways to improve your advertising and promotion so that it costs you less to buy each customer. This can impact and increase profits of your 
business dramatically.
 

Increase customer referrals
The customers who come to you as the result of referrals from your satisfied customers. Developing one or more proven referral systems for your business can have an inordinate impact on your sales and your business will make more money.
 

Eliminate costly services and activities
Many companies get into a routine or rhythm of offering expensive services to their customers that they could easily discontinue with no loss of customer satisfaction. Look at the little services that you offer to your customers. Is there anything that you could reduce or discontinue altogether?
 

Reduce your break-even point
This is the number of items that you must sell each month to break-even or start making a profit. You use this break-even point to evaluate the potential effectiveness of any advertising or any other expense that you incur to increase sales. Every expense to increase profits must be seen as an investment with an expected rate of return that is greater than the cost.
 

Raise your prices
In many situations, you can raise your prices by 5 or 10 percent without experiencing any market resistance. If your products and services are of good quality and your people are friendly and helpful, a small increase in your overall prices will not drive your customers away.
(Lionel Wijesiri is a retired corporate director counting three decades of senior management experience. He is now an independent consultant and a freelance journalist. He may be contacted on [email protected])