Growing profits is difficult these days, let alone growing them exponentially. However, exponential growth in profits is actually possible if you understand the basic number game of business world.
I just read an article written by Brad Sugars for Entrepreneur.com about a simple formula to help you maximize profit margins.
Brad’s formula is so simple, in such a way that stubborn and ignorant business owners refuse to heed his advice and stick to the old, misleading, way to increase profits – Focusing solely on revenues/incomes and expenses in this common way: increase revenues and cut expenses.
This formula will help you grow your profit exponentially within months, even weeks, continuously implementing the simple principle behind the formula, based on these 5 factors:
- Leads: The number of contacts or prospects your business have acquired annually
- Conversion rate: The percentage of your contacts or prospects who actually make a purchase.
- Average dollar sales: The annual estimation of average dollar amount per sale.
- Average number of transaction: The average purchases per customer annually.
- Profit margin: The percentage of profit on each sale.
The profits growth formula in action
If you are comfortable with numbers (you should be!), the formula is no rocket science.
Suppose your business has the following averages and estimates:
4,000 leads annually, 25% conversion rate, $100 average dollar sales annually, 2 transaction per customer annually, and 25% profit margin.
Here is the “secret” formula (Brad called it the “5 Ways” formula):
Leads x Conversion Rate = Customers
Customers x Avg. Value/Dollar Sale x Number of Transactions = Revenue
Revenue x Profit Margins = Profit
Here is the formula in action (with the averages and estimates we have above):
4,000 x 25% = 1,000 Customers
1,000 x $100 x 2 = $200,000 Revenue
$200,000 x 25% = $50,000 Profit
Your business has 1000 customers, $200,000 revenue and $50,000 annually.
Now, what would happen if for the next 12 months you increase the performance of your business by just 10% in the 5 factors: leads, conversion rate, average dollar sales, average number of transaction, and profit margin?
4,400 x 27.5% = 1210 Customers
1210 x $110 x 2.2 = $292,820 Revenue
$292,820 x 27.5% = $80,525.50 Profit
Don’t you realize that increasing your business performance by 10% leads to an increase of $30,525.50 in profit ($80,525.50 – $50,000)? That’s 61% increase in profit!
What’s more, 10%, according to Brad, is not impressive, after all. What about 20% for a start? Do the numbers and you will see surprising result.
What does the formula signify?
By the conventional profit growing method (by increasing sales and reducing overheads), gaining a 61% increase in profits is nearly impossible, especially these days.
The formula is simple, yet many business owners are insisting that what they need to do is a way to cut expenses and find a way to increase sales (some do this by increasing the price tag.)
I’ve done the conventional way, and trust me – The end is not pleasant (remember that I’ve mentioned that I closed my businesses entering the massive economic downturn?)
Don’t do what I did – Do what Brad Sugars is suggesting you (He is a well-known business coach and trainer worldwide, I’m not!)
5 ways formula to grow your profits exponentially
Image by evobrained.