Chasing the Unprofitable Sale

 

Google “how to increase sales” and there are about 924,000,000 results.  Google “how to avoid an unprofitable sale” and there are about 2,340,000 results.  Avoiding the unprofitable sale is just as important as increasing sales.

Every business wants to grow but you don’t want to “grow broke”.  Before embarking on a marketing campaign to increase sales, make sure you understand the structure of your business and the relationship between, sales, cost of goods sold, overheads and ultimately net profit.  There will be times when you try something new and it may not show the expected results.  However, if you understand the financial side of your business, you will be able to identify what does work and what doesn’t work.  A budget together with accurate and timely financial data will support you in making profitable business decisions.

An increase in sales does not mean you have a profitable business.  A business can become more profitable by increasing sales revenue and decreasing costs.  Outlined below are seven effective strategies to increasing profit

1. Increase sales volume

To increase sales volume, you need to find new customers.  This can be an expensive strategy.  It costs 5x more to find a new customer than it does to retain an existing customer.

2. Increase average order value from existing customers

Rather than finding new customers, look after your existing customers and understand the CX (customer experience).  How can you retain customers and what incentives can you offer for them to purchase more each time they are on your site?  Satisfied customers will refer other customers.  Word of mouth remains the most powerful method of advertising and the most cost effective.

3. Increase conversion rate

Increasing sales conversion is one of the most efficient and cost effective ways to increase sales.  Analyse your sales cycle and identify where you are winning and where you are losing.

4. Increase prices

It can be a difficult decision to increase prices as there is the fear of losing customers, but it can result in an increase in total gross profit.  It is important that you regularly review costs and the pricing strategy.

5. Review your cost of goods sold.

Reducing your cost of goods sold will have an immediate impact on your gross profit margin.  You can negotiate prices with existing suppliers or find a new supplier.  If dealing with a new supplier, make sure that the quality and service is comparable.

Another way to reduce cost of goods sold is to make sure that the purchase is necessary and that you are not over servicing your customer.  e.g. packaging, shipping

6. Decrease overhead expenses

Review your overhead expenses and compare current overheads to prior months or years.  Overhead expenses have a tendency to creep up, particularly when the business is performing well.  A reduction in overhead expenses has an immediate increase in net profit.

7. Review gross profit margins on all products and services

Review all products and services and identify those that have the lowest gross profit margin and those that have the highest gross profit margin.  Focus on those products and services that have the highest gross profit margin.  When reviewing the gross profit margin also take into consideration the 80/20 rule.  Generally, 20% of your products or services will generate 80% of your income.  You may choose to stop selling those with the lowest margin or you may choose to increase the selling price.

 

The table below shows the impact on profit by either increasing prices, reducing cost of goods sold or reducing overhead expenses.  There is no set formula and you need to understand how business decisions will impact profit.

 

Base: Current business performance.  Employee expenses is the wage that the owner takes from the business.  This remains constant across all scenarios as we believe that all business owners deserve to be paid their market wage.

Scenario 1:  Spend more on advertising to increase the number of sales.  In the base scenario a $10,000 marketing spend is generating $220,000 in sales.  You decide to start a new campaign and increase the marketing spend by 20%.  However, the increase in marketing spend does not correlate to a 20% increase in profit.  Marketing becomes more expensive as you try to take market share from competitors.  It is assumed that the business has sufficient resources to operate under the current cost structure.  Although sales have increased by $27,300 the business remains unprofitable.

Scenario 2:  Base scenario with a review of cost of goods sold to reduce the cost of inputs (including shipping for an ecommerce business).  A reduction in the cost of goods sold results in a 6% increase in the gross profit margin.  The business still does not return a net profit before tax.

Scenario 3: From the base scenario, increase sales by increasing the selling price (and this may reduce the number of sales), reduce cost of goods sold, identify marketing that has the highest conversion and stop spending on the least efficient, move to smaller premises and cut operating expenses by 10%.  The business becomes profitable.

 

For your business to be profitable you need to understand the impact of business decisions.  Every business needs a budget.  The budget outlines your goals and provides a foundation to measure business performance.  If you measure budget to actual you will understand where your business is performing as expected (or exceeding) and the areas where the business is performing below expectation.  You can then make changes within your business to increase profit.  As such, it is imperative that every business has accurate and timely financial information.  Inaccurate or incomplete financial information can lead to toxic assumptions which can be detrimental to business performance.

 

Enterprise Growth can help you:

• Interpret a profit & loss balance sheet
• Prepare a budget
• Setup cost effective and efficient processing of source documents
• Generate accurate bookkeeping and financial information
• Have a profitable business.

 

To help business owners, we are offering a free no obligation 30 minute business health check for the first 10 business owners that email hello@enterprisegrowth.com.au with “business health check” in the subject line.