The majority of business owners we—as business coaches—get to interact with, work extremely hard to increase their profits, and the sad part is that they don’t realise that they are missing the opportunity to make huge gains on their bottom line by simply not leveraging five important inputs.
Normally we look at profit growth from the standpoint of three variables: sales, expenses and profits. The formula:
Sales – Expenses = Profits
Typically, business owners either look at increasing sales or decreasing expenses to improve profitability.
The ActionCOACH 5–Ways Model expands upon this traditional view and breaks the sales variable into five separate profit-generating areas:
- Lead Generation
- Conversion Rate
- Average Sale
- Average Number of Transactions
- Profit Margin
These five areas make up the profit-generating equations. Increasing any of these variables can increase your sales and profits while keeping expenses constant.
As you can see here; Customers, Revenue, and Profit are the “outputs” or results in this formula. Leads, Conversion Rate, Average Sale, Number of Transactions, and Profit Margin are the “inputs” that drive these “outputs”. Therefore, if you want to change the outputs in the formula, you simply change the inputs.
The great strength of the “5 Ways Model” lies in its compounding effect. With a compounding formula, small improvements to each part of the formula can dramatically improve your results.
In today’s highly competitive business world, we want more customers, more revenues, and more profits. However, as we have seen with the “5 Ways Model”, these are merely outputs. Understanding the five key inputs and knowing how to test and measure absolutely everything, is critical in driving your profits, revenue, and customers effectively.
Leads are generated from an effective sales and marketing system. This is the vital activity that creates potential buyers or ‘prospects,’ the lifeblood of your business. The challenge is knowing which marketing strategies are working. A solid “Test and Measure” system is critical to evaluate what really works.
The conversion rate is the percentage of people that buy versus those who could have bought. For example; if 10 people interact with your business and three buy something, then the conversion rate is 3 out of 10, or 30%. This is where the strength of your Sales Team is tested – without a robust sales system, your lead generation efforts are not being leveraged.
An average number of transactions is the number of purchases the average customer will make over a year. Developing repeat customers is a great way to cost-effectively increase your profits. Successful businesses have effective ways to ensure their customers keep coming back.
Average sale is the average amount spent by the average customer with each purchase. Up-selling and cross-selling products that are of value to the customer at the point–of-sale will help to increase your revenues. Having consistent up-selling or cross-selling tactics in place will make a huge difference in profits.
If a business sells something for R1000 and makes R250 profit, the profit margin is 25%. The margin is the profit percentage of total sales.
It is vital to know profit margins for each product or service you sell; this way you can ensure you are maximising sales of your most profitable lines, and minimising time and resources selling low-profit margin lines.
If you are interested in going more in-depth with our “5 Ways Model”, book a complimentary coaching session – get your business thriving!
Andre van Rooyen, ActionCOACH Business Coach