As hard as you work, doesn’t it make sense that you ought to be able to bring home as much money as possible? Absolutely. It’s one of the primary reasons why people like you and me start businesses. Yes, we start them to make a difference, to solve a problem, employ people, support our communities, etc. But we also start them (and work hard in them) in order to provide a good income for ourselves and, if you have a family, your family.
However, far too often, business owners and entrepreneurs spend way too little time managing the bottom line. Driving top line revenue gets a lot of press. Solving team problems gets a lot of time. But, at the end of the day, the metric that matters most often gets the least amount of attention (i.e. net profit).
Over the years, I’ve watched people double, triple, even quadruple their gross revenues and yet not see any significant growth in their profitability. Why? Because they were totally focused on top line growth and not bottom line profitability (despite my warnings).
In the BizScalers Club, two phrases I frequently use, that you may or may not be familiar with are
1. Revenue is vanity, profit is sanity
2. Revenue is for show, profit is for dough
When it’s all said and done, it’s the number at the bottom of the income statement that really matters. That’s the number that builds your net worth and decreases your stress.
So, how can you dramatically increase your profits so you can decrease your stress and have a bigger nest egg?
I. Increase Your Prices
Now, before you think I’m cheating on how to increase your profits, this is probably the biggest lever for increasing profitability. Why? Because most business owners and entrepreneurs tend to think that prices are fixed—and they’re not. Pricing is far more elastic than most of us think.
For example, let’s take a burger. Can you buy a burger for a buck? Absolutely. Can you buy one for $2.99? Yep. How about $4.99? Same. How about $9.99? Yep. How about $14.99? Okay, how about $25? Yep. How about $1,728? Yep. You can buy a seventeen hundred dollar burger with black truffles, Kobe wagyu beef, lobster, beluga caviar, venison, a duck egg and edible gold leaf.
The point is, if you keep your cost basis the same (or grow it slower than the growth rate of your revenue) you’ll automatically increase your profits and profit margin.
For example, if you’re running a $2M business and your expenses are $1.8M and without changing anything other than the price point of what your customers are already buying so your revenue grows (let’s say 10%), you’re now looking at $400K in profit vs. $200K—and all that was necessary was raising your prices by an average of 10% across the board.
Of course, the only way to know for sure if you’re at the right price point is through testing. Yes, you might lose some customers. But, in general, you’ll make more with fewer people at higher price points.
So, when was the last time you tested a higher price point? And if you got pushback on the pricing, how did you respond?
II. Fire Your Unprofitable Customers
Virtually every business has them (i.e. customers who cost more than they bring in). So, when was the last time you did an assessment of your customer base?
I’ve found very few business owners and entrepreneurs who really know who is and who isn’t profitable.
Just because a client has a big name in your sphere of influence or runs a big business doesn’t mean they’re profitable.
In addition, it’s always worth analyzing the amount of staff time a specific client/customer takes. You know what I’m talking about. Certain clients/customers require a lot more time and energy than your typical client/customer—and rarely do most business owners add that cost back into the cost of that customer.
For example, let’s say your typical client spend $3K per year with you and you have a 33% net profit margin (i.e. you net $1K per customer). Joe, on the other hand, is double that. He spends at least $6K per year, which means you make $2K per year off of him. That sounds good,
However, Joe is far more demanding that your typical customer. He often sends back purchases because they don’t meet his specifications. You end up having to get involved in some of those discussions. He tends to pay 60 days late. He either calls or emails you or someone on your team every week (and his emails are always long). Etc.
When you add up all the time and concessions, you quickly realize that you’re not making $2K on Joe at all. In reality, you’re losing $500. Plus, you’re losing out on opportunity cost (time that could be spent attracting new customers or working on your next innovation or joint venture). When you add all that in, you realize that you’re actually losing more than $2K per year off of Joe. The moment you “fire” him, is the moment your profit line goes up.
So, who do you need to let go of?
III. Move to Value-Based Pricing
The problem for most service-based businesses is that there’s a direct relationship between time and money. However, if you want to bank more money, you have to move your margins up. There are a number of ways to do this but one of the best options is to use value-based pricing. Why? Because it aligns your interests and the interests of your client/customer.
The problem of billing by the hour is that you’re incentivized to take more time. If you bill at $200/hour (and you pay your programmer $100/hr.) and you can get the job done in five hours or seven hours, which is in your best interest? Exactly, seven. But, is that in the best interest for your client? No.
However, if you’re working on a project that will save your client $20,000/year in expenses, is that worth them investing $2,000 in? Absolutely. That’s a 10X return … in year one, let alone in year two or year three, etc. So, is that a fair price for your client? Absolutely. The number of hours is irrelevant. What matters is the result (saving $20k/year for X number of years).
On the other hand, you’ve completely changed your margins. Instead of billing at five or seven hours, you’re now incentivized to get the project done as quickly as possible. At five hours at $200, you end up with a gross profit of $500. However, at $2,000, you end up with a gross profit of $1,500 (and possibly $1,600 if you can get your programmer to work faster).
In other words, by switching to value-based billing, using the example above, you just increased your profits by 200% (an extra $1,000 in gross profits). That sounds pretty sweet!
To read more about why value based billing is better, click on the following link (Why Value Based Fees Are Better For You)
So, how can you move to more value-based billing?
IV. Eliminate Your Unprofitable and/or Low Margin Products
When was the last time you evaluated the profitability of your products/services and what was/is their real marginal contribution to your profits?
Chances are, it’s either been awhile or never. Don’t worry, you’re normal. I’ve even worked with financial services companies that don’t know these numbers.
I remember working with a bank several years ago when I asked this question, “Do you know what the profit is on each of these product lines?” Their answer, “No.”
So, I suggested, “Maybe we ought to figure that out.” Well, it turned out that the product that they were currently running all of their marketing towards actually didn’t make them any money (when all the costs associated with it were added into the profitability question).
Now, it doesn’t take a rocket scientist to figure out that selling more of something that’s costing you money is a losing game if your goal is to grow!
However, it doesn’t have to just be unprofitable in order to warrant taking a hatchet to it. If you want to grow your profits, killing any products and/or services with low margins and keeping only products and services with high margins is a smart strategy. The moment you kill the low margin products, your profit margin increases.
So, what products and/or services do you have that are either unprofitable or low margin?
Then, what are you going to do about them?
Yes, you might take a revenue hit for a period of time. But isn’t that worth the increase in profit? Remember, it’s not the top line revenue number that really matters. It’s the bottom line profit number that does.
V. Reduce Your Head Count
This is the hardest one of all—but as the person at the top of your business, it’s one of the strategies that you have to keep in your pocket at all times.
One of the reasons why I’m so passionate about working with small business owners and entrepreneurs who want to scale their businesses is because I’m passionate about helping people like you hire more people. I want you to hire people. I want you to provide well for your staff. I want you to put food on the table for lots of people.
However, there are times when a business has over-hired. In fact, I talked with a company this week that’s in that position. Yes, they can grow their revenues, but they’ve also hired too many people for the size of company they are. So, while they might be able to “grow” their way out of the problem, that’s really a way to avoid dealing with a bigger issue (needing to let a few people go).
While there are some industries for which this isn’t true, for most of us in the service-based industry, labor is the largest percentage of our budgets. So, if you want to make a sizable reduction in your cost basis, then you need to be willing to look at your labor cost.
Yes, you can tweak your electric bill. And yes, you can tweak your paper costs. But there are few items in any service-based business which can compete with labor.
So, take a look at your org chart. Do you have too many people for your revenue and profit numbers? Be honest. Most small businesses can usually cut one or two positions (or more) and it won’t significantly impact their performance (usually these are underperforming employees any ways). However, the impact on profitability can be huge.
Note: I’m not saying you should reduce you head count. Remember, I’m pro hiring people to grow your business. But if you’re one of those people who has too many people on the payroll, this simple strategy works.
So, there you go. Five simple strategies to dramatically increase your profits.
- Increase your prices
- Fire your unprofitable customers
- Move to more value-based pricing
- Eliminate your unprofitable and/or low margin products/services
- Reduce your head count
The question for you is, “Which do you need to execute on?”
Whatever the answer, do it! Because if you will, you’ll be the one to dramatically increase your profits—and that will increase your sanity while decreasing your stress.
To your accelerated success!