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Marketing Strategies

By Brandt Stohr

Republish: EasyPublish™ Published: 28Mar2008 Word count: 739 Viewed: 261 time(s) Get Free Content For Your Site

There are three ways to grow your business profits. Most business owners believe that there are an unlimited number of ways to grow your business, however; they are incorrect. There are only three primary ways in which businesses can grow. Understanding these fundamentals can help business owners to distinguish what they need to accomplish for their businesses to not only survive, but to thrive. I will first go over the three ways and in subsequent articles I will dive deeper into each one.

The first method is the most common method and that is to raise your gross sales. This means that you raise the number of units sold. When you look at traditional business this is where 90% of all the effort goes into improving the profits of a business. Not to say that it is not important, however; it is the least effective return on investment of the three ways to grow your profits in any business.

The second and much easier way to grow your business is to increase the size of the transaction. If your average ticket price is $2,500, think about the impact on your bottom line if you can raise that by 20% to $3,000. For most businesses the fixed costs exceed the variable costs, so the incremental difference in expense would be very little, leaving the majority of the gain to go directly to the bottom line.

The third way, and I personally believe the most important way to grow your business, is to increase the frequency of the purchase. For instance if your client currently purchases from you an average of once per year, let's bump that up to 1.2 times per year. This is a twenty percent increase in volume by just increasing the frequency of the purchase. We will go over in more detail several ways to affect each of these areas but for now let's take a look at what the impact is of these changes.

For simplicity sake we will take a service company that is generating $1,000,000 in gross sales, their fixed overhead at this volume is $400,000 which covers real estate, administration, advertising and general operating expenses. The variable expenses are $350,000 which covers sales commissions, allowances, returns, costs of goods, etc. This leaves the company with a $250,000 pre tax profit. Or a 25% net income after all expenses.

Taking our example above we are going to increase each area by 20%. Gross sales from above will go from $1,000,000 to $1,200,000 which represents 480 units sold at $2,500 average. The average ticket price we will increase by 20% which changes that from $2,500 to $3,000. With 480 sales at $3,000 per sale now our gross sales are at $1,440,000. The frequency was the average client purchasing once per year, we are going to increase that by 20% to an average 1.2 times per year which increases our gross annual sales to $1,728,000.

Let's take a look at the impact increasing these three areas has on the businesses bottom line. In this example I am using a business, however; this directly applies to commission sales people as well. We have fixed overhead of $400,000, the increase in the sales will more than likely only have a very small affect on these fixed costs for most businesses, however; let's say that a few more admin people are needed and possibly a larger facility was required so let's move fixed costs up by 25% to $500,000. Our variable costs were at $350,000 or 35% of gross sales, these should stay the same as a percentage or if anything decreases as larger efficiencies of scale start to occur. Let's leave the variable costs the same as a percentage of sales volume and we will use 35%. Our fixed costs now are $500,000 and our variable costs are $604,800 or 35% of $1,728,000.

This leaves us with a net profit of $623,200 instead of $250,000; that's a 250% or two and a half times increase in net profit to the businesses bottom line! That is the power of a simple increase of twenty percent in all three areas, it's exponential to the bottom line and every business has room to do it.

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