Increasing business profitability while simultaneously growing is the Holy Grail for most small business owners. While you may assume that one will follow the other, what most business owners don’t realise is that a business can actually grow too fast, impacting both cash flow and overall profitability.
However, while most people might assume that reducing your costs is the most obvious tactic to increasing profitability in your business, in my opinion there are 3 additional revenue-driving steps that should be taken before you even look at your cost base. These 4 steps in combination will have the biggest overall effect on increasing business profitability:
1. Increase the number of customers
While increasing the number of customers may also sound obvious, it’s important to remember that more customers doesn’t necessarily mean greater profit if your cost to serve those customers increases disproportionately or they are lower value customers than your existing base.
There are a couple of tactics you can use to increase the number of customers you have but I’d suggest making sure you have the fundamentals correct first.
These include making sure you have a specific target customer in mind to ensure that your marketing efforts are tailored to reaching these people rather having a shotgun approach.
Also, make sure you have a good understanding of the main reason your current customers do business with you over your competitors – in other words, what is your unique selling proposition. Then promote that to your prospective customers.
2. Increase the frequency of sales
As we all know, winning new customers is way harder and more costly than retaining the ones that you’ve already got. That’s why increasing the frequency of sales from existing customers is the most profitable way to sell.
Start by segmenting your customers and identifying those who are most profitable to your business – your A-class customers. Then make sure you are providing awesome customer service consistently.
Nurturing your existing customers with regular communications, including special offers and birthday cards, to make them feel valued and motivated to buy more frequently from you is a really cost-effective way to increase sales frequency.
3. Increase the average sales value
You’ve done the hard work by winning the customer in the first place, so leveraging the return on that investment makes perfect sense.
There are a number of sales strategies that you could look to implement to increase the average sale transaction value.
These include: cross selling, where you sell other products or services from your range in addition to the customer’s original choice; up-selling, where you move a customer from a lower to a higher-priced product or service and packaging or bundling things together to create a higher perceived value in the mind of the customer.
4. Drive down costs
As I said at the beginning, many people assume that reducing costs is the most obvious place to start and that it will give you the biggest bang for your buck, however doing this first or just doing this in isolation, without also looking at ways to grow your business, won’t deliver the most effective results.
When looking at reducing your business costs, there are however some obvious places to start including:
- Change suppliers to see if can get you a better deal
- Reduce inventory levels especially on stock that is particularly slow-moving.
- Buy in bulk for faster moving items.
- Reduce overheads maybe by replacing old equipment and machinery with more modern, efficient systems.
While it may sound a little simplistic, these really are the four fundamental ways to grow your business profitably.
What most small business owners don’t realise is that the compound effect of achieving relatively small changes – in the region of 4 or 5% – in each of these areas will result in a dramatic increase on the bottom line of between 30% and 50%!
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Interested to Learn More?
If you need specific advice about increasing business profitability get in touch with a business growth advisor at Taggart & Partners by calling 07 3391 1188 now. A business accountant from our friendly team will be happy to answer your questions.