By Paul Sherratt of Solutions for Sport
For many businesses, the start of the year is the time to look back at the previous 12 months and begin to plan for the year ahead.
Inevitably, part of this process will involve a look at the books and a review of the bottom line. In simple terms, every business strives to make more money, save more money and be more competitive, since these are the driving forces behind performance and growth. If you can address these aspects of business, you can reap the rewards in 2015.
The theory of the aggregation of marginal gains has been a buzzword in the sporting goods industry since Dave Brailsford used this theory to great effect with British cycling. The principle being that a multitude of small changes can have a large overall effect.
In practice, this theory has been around for years. In the 1980s, for example, American Airlines removed a single, unnoticed olive from every salad served to passengers and saved $40,000 per year. When it comes to efficiencies, cost savings and competitive edge in your business, where’s your olive?
What are the factors that can be multiplied to deliver stellar bottom line profits?
• Leads. The total number of people who have been contacted, visited your store/website and communicated with you during the year.
• Conversion rate. The percentage of people who make a purchase.
• Average selling price. The average amount per sale, estimated over a year. For example, an annual revenue of £350,000 divided by 10,000 individual sales equals a £35 ASP.
• Average number of transactions. The number of purchases the average customer will make over the course of a year.
• Profit margin. The profit percentage on every sale. If a business sells something for £1,000 and profit was £250, the profit margin is 25 per cent.
How does this relate to top line revenue and bottom line profit? Using a sample company, there’s a simple formula to multiply the factors we’ve discussed. Note that since this formula uses multiple factors, instead of just adding them, the cumulative impact is massive.
The 5 Ways Formula looks like this:
Leads x conversion rate = customers.
Customers x ASP x number of transactions = revenue.
Revenue x profit margins = profit.
Let’s say we have estimated or fully determined the following numbers:
4,000 x 25 per cent = 1,000 customers.
1,000 x £100 x 2 = £200,000 revenue.
£200,000 x 25 per cent = £50,000 profit.
This means you’re running a business that converts one in four prospects into paying customers. Those customers average two purchases at £100 per purchase each year and your company enjoys a 25 per cent profit margin on revenues of £200,000. Your total profit for the year is £50,000.
What would happen if, over the course of the next year, you were able to change one – or all – of these factors? Let’s say they all changed by 10 per cent:
4,400 x 27.5 per cent = 1,210 customers.
1,210 x £110 x 2.2 = £292,820 revenue.
£292,820 x 27.5 per cent = £80,526 profit.
Examine the numbers closely and you’ll see that the 10 per cent increase is incremental, which means you could easily nudge numbers up by that amount over a period of months or even weeks. Even though we’ve increased each factor by 10 per cent (including top line revenue), we were able to boost bottom line profit by 61 per cent – or a total of £30,526.
As part of your review process, do some further work with your own numbers and brainstorm ways in which you can increase them in each category:
• Increase leads. Use local marketing, contact clubs and schools, increase your social media activity and build your customer base.
• Get more customers coming back. Introduce a loyalty/voucher scheme.
• Increase the amount customers spend. Think about ‘checkout candy’ impulse purchases – learn from the supermarkets.
• Raise your profit margins. Buy better/smarter. Push you suppliers for better terms.
Use your time reviewing your business effectively and you’ll be more than happy with the ultimate results.