We’re starting a four-part series today, on the four processes that affect your bottom line. They are The Sales Process, The Production Process, The Delivery Process and The Billing and Payment Process.
Today, we’ll talk about your Sales Process. One of the questions I get asked often is how can I improve my profitability? Everybody wants more, but it’s difficult to obtain because you have to change profitability by changing the variables that drive it.
Let me tell you what I mean. There are some very distinct variables that drive the profitability of your business and I’m going to talk about them in the form of equations.
Leads x Conversion Rate = Customers
If you want to increase your profitability, you can focus on simply getting more leads or increasing your conversion rate.
Example 1: If I increase my leads from 200 to 250 and my conversion rate is 33%, I’ll get 16.5 more new clients if I can maintain conversion rate.
Example 2: Maybe I want to improve my conversion from 33% to 40% on the existing 200 leads I have. If I’m successful, I’ll have 14 more clients because I’m converting more efficiently.
Number of Transactions x Average $ Sale = Revenue
If you want to increase your bottom line, you may want to increase the number of transactions (sales volume) or increase your average $ sale.
Example 1: If I increase my number of transactions by 20% from 200 to 240 and my average sale if $15,000, then my volume will go up by $600,000 just due to higher activity.
Example 2: Another way is if I’m happy with doing 200 transactions, but I really want to try to increase my average sale from $15,000 to $30,000, I don’t have to increase my volume, I just go after larger orders and still hit the $600,000 increase.
Revenue x Margin = Profit
You have two margins in your business: your gross profit (before operating expenses) and net profit (after operating expenses).
Example 1: If you want to increase your gross profit margin, you either increase prices or decrease cost of goods (labor and/or materials).
Example 2: If you want to increase your net profit margin, then you have to look at overhead and other operating expenses for places to cut. Sometimes when things are going well, we don’t look as hard as we should for places to cut.
So, where do you start? That’s the fun part. You get to pick!
- You can work with your sales people on how to find more leads or improving their conversion rate.
- You can work with them either on increasing the number of transactions they do in a year or the average dollar sale of each transaction. Doing more volume or going after bigger fish are both good strategies.
- You can work with your sales people on implementing price increases equal to the perceived value you create in the marketplace.
When you’re making changes in your sales process, I would encourage you to focus on one of these and track your results. Make sure you keep a compelling scorecard that measures the desired change you’re looking to accomplish. That way your sales people know if they’re winning or losing.
When you find the right recipe, using these ingredients, you’re well on your way to impacting your bottom line.