What are the 9 drivers that affect your profitability?
You can’t manage profit. Profit is simply an end result.
A simple model…change the numbers change your profit
To get to what drives our profit we need to know how it is made up, so looking at our basic we have:
PROFIT = SALES – COSTS
Taking into account costs this can be developed into:
PROFIT = SALES – VARIABLE COSTS – FIXED COSTS
After looking at costs, let’s look at sales:
Profit = (Customers x Spend x Transactions) – Variable Costs – Fixed Costs
You can change the numbers with customers by:
1. Getting more sales leads
2. Converting more of those sales leads into customers
3. Reducing the number of customers that leave
The price driver
By changing your prices you can change your profit. Price is important because it has no impact on cost and is one of the reasons why, mathematically, price is the most powerful lever in the profit equation.
Systems…the final driver
The final driver is to systemise everything. To create systems for improving each of the drivers of profits, e.g. customer service systems, selling systems, referral systems, pricing systems.
Here are the 9 profit drivers:
1. Getting more sales leads (Marketing)
2. Converting sales leads into customers (Sales)
3. Getting customers to spend more (Marketing)
4. Getting customers to spend more often (Marketing)
5. Getting customers to remain customers for longer (Customer Service)
6. Pricing for maximum profit (Pricing/Marketing)
7. Variable costs (Operational)
8. Fixed costs (Operational)
9. Systemise everything (Operational)
So which one should you focus on?
You should work on all of them simultaneously. But if you were to pick one you should always start with price. Firstly, it is the most powerful lever in the profit equation i.e. it has the biggest mathematical impact on profit. Secondly, it can have an immediate impact on profit.
You must also understand how each of the drivers impacts other elements of the profit equation. Most businesses focus on getting more sales leads and winning more customers. However, if the price is wrong (or by giving discounts to attract new customers) very often this can have a negative impact on profit.
This is why we specialise in pricing. Get your pricing right and you’ll see your profits rising significantly. Get it wrong and it’s a fast way to go out of business.
This is why we always start with the numbers before creating your pricing strategy.