How To Increase Profit

Two of my favourite business gurus - Jay Abraham and Rich Schefren - have combined forces and are bringing together many other business experts to create the League Of Extraordinary Minds.

This will give you access to a large amount of free information to help you to increase profit so I recommend that you sign up for details (this is an affiliate link).

Over 27,000 entrepreneurs took up this offer of free business advice in the first four days. Make sure that you don't miss out on tips that could make a big difference to your profits.

If you are a fan of Jay Abraham, and I have never known anyone with a better mindset for finding and exploiting opportunities for profit, the bonus offer for the mp3 copies of the recordings is stacked with bonuses and is great value - see League Of Extraordinary Minds Bonus

I have also created a Squidoo page for the League of Extraordinary Minds

Good question because accountants and economists don't agree what profit is.

At first glance, this first section may seem boring but if you have the wrong idea of what profit is, you will find it much more difficult to increase profit in your business.

If you don't understand the profit concept you risk working long hours for little financial gain so please bear with me and read through this section.

How Economists Look At Profit

To an economist profit is the extra return you make over and above your next best alternative.

For example if you have a self employed service business that involves exchanging your time for money and you earn £50,000 per year and your next best alternative would be to be employed on a salary of £40,000 per year, the profit from being self employed is £10,000.

How An Accountant Looks At Profit

In contrast, an accountant says that profit is the excess of sales over costs and different levels of profit are defined depending on which costs are deducted.

For example if you have a business earning:

Sales of £500,000 per year

Variable Costs of £220,000 per year

Fixed Costs (Overheads or SG&A) of £180,000

Interest Costs of £20,000

Tax Charges of £15,000

An accountant will say you have:

Gross Profit (aka Margin or Contribution) of £280,000 (500-220)

Operating Profit of £100,000 (260-180)

Profit Before Tax of £80,000 (100-20)

Profit After Tax of £65,000 (80-15)

Sorry that is a lot of different numbers but I want you to become familar with the terms I will be using.

One of the difficulties with understanding finance is that people use different words for the same measure or the same words with different definitions. It all creates confusion.

Why I Am Telling You This

I will be focusing on the accountants definition of Operating Profit as the fairest measure of your current business performance but it is the final Profit After Tax that puts long term cash into your bank account.

The interest charge in your business is a function of how much your borrow and the rate of interest. If you decide to withdraw cash from your business to buy the yacht you have always wanted, the interest cost will increase but it was driven by a personal rather than business decision.

Since I believe that the purpose of making more money is so that you can have a better life as well as contributing to the wellbeing of others, it doesn't make sense for me to be asking you to hoard cash in your business so that you have a low interest charge.

The tax charge depends on the level of your profits and the rate of business tax. I recommend that you find an excellent accountant to help you to minimise the tax you pay, but much of the tax charge will be outside of your control. It is one of those rules - you want more profit, you generally have to be prepared to pay more tax.

The economists view of profit may seem esoteric and abstract compared to the definitive numbers provided by an accountant but it provides one of the biggest lessons in how you can increase profits.

It challenges your thinking about the different options and opportunities and stops you settling for a sub-optimal combination of strategies that stop you earning as much profit as you could.

The journey towards increasing your profit begins in your mind.

If you accept second rate levels of performance you will find it very difficult to increase your profits. You may try many ideas but each won't perform as well as it could.

My headline paraphrases a quote from my favourite business guru Jay Abraham, a marketing genius with an incredible talent for finding and exploiting profitable opportunities.

The full quote would be:

"I have a simple philosophy in life. You shouldn't steal from yourself.... You owe it to yourself and to everyone else [who depends on your business] to get the highest and best results. You should never accept a fraction of the yield when for the same effort or less, the same people or fewer, the same time or less.... can deliver so much more to you"
(Jay Abraham).

I find that such a power statement but also so liberating.

When you want to increase your profit, you need to be open to consider as many ideas as you can.

Your salesman may be doing well and bringing in a good level of business but with the right training, could he open more doors, and convert more leads into orders at higher prices and margins?

Your website may be attracting high levels of traffic but could it convert that traffic into more orders or orders of a higher value?

Your productivity may be good but by a careful assessment of the process can you eliminate time delays and excess costs?

Good is worthy but to increase your profit you need to move from good to great and to do that you need to have the right mindset.

You need to look at your business from the economist's perspective and ask if that £5,000 of cost which is generating £10,000 of profit be improved so that it creates £20,000?

There are many sources of advice for increasing your profit but before we look at any of those I want to still work on your mind.

Jay Abraham encourages you to take a funnel vision and not a tunnel vision towards your business.

Other gurus use a similar concept but I like the funnel analogy to the solution to a common problem.

When you have worked in an industry or market for many years it is very easy to accept things as they are.

"That's just the way we compete."

You go to the exhibition because your competitors go.

You have a website because your competitors have a website.

You don't advertise because your competitors don't advertise.

Sometimes it is true but sometimes it isn't.

Twenty years ago it was believed that banks needed to have hundreds or thousands of local branches on the High Street. Now it can all be done via the Internet and telephone.

Your Starting Point

Please study and analyse how other companies deal with you as a buyer.

What do they do?

Is it good and can you adapt the idea? Is it bad but are you making the same mistake?

If you want more sales leads through referrals then start looking at how other businesses encourage you to make referrals and when.

If you advertise and you are not happy with your returns, look at the adverts that catch your attention and try to work out why.

I wrote this page to help promote my own profit coaching services but I recognise that times are tough and one-to-one coaching can seem expensive.

I have provided guidance of how you can be your own business profit coach on my coaching blog.

I called it

"A DIY Guide To Business Coaching: How to Build Up Your Business Skills, Accountability, Commitment And Success On A Low Cost Diet Of Business Advice"

I wrote it because I had a phone call from a struggling business owner who needed help but who couldn't afford to pay my fees.

The formula for increasing profit is easy to write and understand but it is not as easy to put into practice.

Usually there is some form of trade-off involved:

You can increase your sales volumes if you reduce your prices (or vice versa).

You could increase your sales volumes if you increase your advertising costs.

You could save costs in the future by incurring costs now.

The more of these variations you consider and try, the more difficult it is to understand and assess the likely impact on your profit.

You have to be able to weigh up the alternatives so that you can make what you believe to be the right decisions to increase profit..

For that you need to be very clear on how your business model works and generates profit.

My intention is to add tips for you to consider to:

1 - Increase Your Sales Volumes

2 - Increase Your Prices

3 - Reduce Your Costs

together with a collection of other resources and recommended programs.

I have another Squidoo lens that takes you through my own profit improvement process on How To Increase Business Profitability.

This is a structured approach based on my Eight Pillars of Business Prosperity and is intended as a do it yourself business coaching guide.

If you remember we started with a business with $1 million of sales, a gross profit of $400,000 and an operating profit of $100,000.

Option 1 - Increase Sales Volumes By Reducing Sales Prices by 10%.

There are two effects here and it is worth separating them out to help you to understand.

If you increase sales by 50% without reducing your prices, then sales would increase to $1.5 million and your gross profit would be $600,000. This means $200,000 extra profit as your costs are assumed to stay the same.

Unfortunately your sales prices have to be reduced and a 10% reduction will reduce the $1.5m sales by $150k to $1.35 million.

Price changes are pure profit so that $150k reduction reduces the extra profit from the 50% extra volume to $50k.

It seems that your sales manager has put forward a good suggestion although you will need to check his assumptions on how competitors will react.

What could happen is that your competitors also reduce their prices by 10%. Customers no longer have an incentive to buy from you and your volume stays the same as at the start but instead of your sales being $1 million, your sales are now $900k and your profit $0k.

Option 2 - Increased Advertising

This is an interesting proposal from your marketing manager but instead of having a trade off between two of your profit drivers, this proposal affects all three.

First, the $100k of advertising will move your costs up from $300k to $400k and your profit down to $ zero.

Second, the advertising is expected to increase your sales volumes by 20%. This means $200k extra sales and at existing prices with the 40% margin, this means an extra $80k of profit.

At this stage you are still down on the deal but that changes when we have a look at the impact of your price increase.

You started with $1 million of sales and the advertising generated 20% of extra volume making $1.2 million. A 10% price increase is therefore worth $120k.

Since price changes impact directly on profit, your profit moves from the $80k we had before the price effect was built in to $200k with the price effect.

This means that if the Marketing Manager's plan works, it is worth $100k more than the current situation and $50k better than the Sales Manager's plan.

Which should you choose?

We have to assume that they have both made equally reliable estimates but because this is the future and there is no certainty, we should assess the risks.

If both plans go wrong, the current $100k profit disappears through the sales price reduction in the Sales Manager's plan and through the advertising costs in the Marketing Manager's proposal.

If there was no uncertainty, you would choose to advertise. It gives you smaller sales but higher profit.

If you judged that there was a 50% chance of things going to plan and a 50% chance of the worst happening, you would send them both back to the drawing board. There is no point risking $100k to gain $50k or even $100k on what is effectively the flip of a coin.

You would need either a higher probability of success or a better risk/reward relationship.

There is a tendency to over-complicate so let me start by introducing you to Jay Abraham's three ways to grow a business model.

The Three Ways To Grow A Business Model

You may be thinking "There are thousands of ways to grow a business. How can the world's highest paid marketing consultant say that there are just three ways?"

The answer lies in the arithmetic and it will make more sense when I explain that the three methods are:

1 - Increasing the number of customers

2 - Increasing the average transaction value

3 - Increasing the number of times they buy

This may make more sense if I work through a numbers example.

Imagine you had a business with sales of $1000k per year.

Quick investigation shows that you have

1 - 200 customers
2 - spending on average $5,000

which when broken down into individual transactions you learn becomes

3 - 5 purchases per year at an average of $1,000 per transaction.

So the $1,000k = 200 customers x £1,000 average transaction x 5 transactions per year.

Pretty simple isn't it but don't make the mistake of dismissing it as obvious.

When many businesses think about increasing their sales, they immediately start thinking of ways to attract new customers but as the Jay Abraham model shows, there are two other ways which are often overlooked.

What is interesting is that the average transaction value and number of transactions may offer far greater opportunities for improvement than trying to increase the number of customers.

I have seen various statistics referred to but it is said that it is 6 to 10 times easier and less expensive to sell to an existing customer than it is to sell to a new customer.

Even working interesting is that if you can work on all three levers at the same time you get the power of geometry to create exponential growth.

Remember the initial example of 200 customers making 5 transactions of $1k per year.

Suppose strategies are found to:

1 - Increase the number of customers by 20% from 200 to 240.

2 - Increase the number of transactions by 40% from 5 to 7 times per year

3 - Increase the average transaction value by 30% from $1k to $1.3k.

20 x 7 x 1.3 = $2,184k an increase of over 118%.

This is the power of the model.

If you don't focus any attention on increasing the average transaction value and the number of purchases, you could be missing out on a fortune.

The Strategy of Preeminence

Before looking at the three ways to grow your business and increase your sales volumes in detail I want to explain a core Jay Abraham philosophy called the Strategy of Preeminence.

Forget sleazy sales tactics and focus on what is in the best interests of your customer.

What can give your customer the benefits and result they most want?

For example in a recent video, Jay Abraham explains that he has an indulgence for having his hair cut every 10 days to maintain his appearance the way he wants it.

He explained this to his hairdresser and gave his hairdresser tips on explaining the effect on appearance of delaying a hair cut. Since customers want to look good, the hairdresser was acting in accordance with the strategy of preeminence of looking after their best interests.

The new strategy resulted in the average number of visits per year by an average customer increasing by three.

Increasing Leads From Prospective Customers

To attract more prospective customers you either need to do more marketing and advertising so that more people see details of your business and offer or to make your advertising more effective.

To increase profit, my advice is to improve the effectiveness of your marketing before you spend more money. You should make your marketing compelling with an irresistible offer which target customers want to buy or at least know more about.

Top direct marketer and copywriter Dan Kennedy is offering a two month free trial of his No BS marketing letter - well worth trying (affiiliate link).

Increasing Sales Conversions

If you can change the rate you convert new enquiries into new customers, you get an immediate boost in sales and profits which is multiplied by your actions to increase future sales.

Changing conversion rates from 1 in 5 to 1 in 4 gives you a 25% increase and you can do it by improving your sales skills.

I have looked at a lot of selling systems over the years and disliked many of them for sleazy sales closing techniques and manipulation although I have heard many times just using any sales system can have a big positive increase and lead to higher profits.

The best selling system I have seen is the New Game of Selling by American business growth expert Mitch Axelrod. It's not the best known but it is a highly ethical and effective way to sell which has generated over $2 billion of extra sales (affiliate link).

I am fascinated by the role of pricing in business and believe that price is the number one biggest driver of profit and its critical importance is missed by many business owners.

Do you sell a commodity product or service or is it (or can it be) differentiated from your competitors in any way?

Too many businesses fall into the trap of thinking that price is the number one purchase criteria with their customers. Research studies show that selection, service, quality and confidence in the supplier are usually more important. Unfortunately this means that they undercharge and earn lower profits than they could.

First let's bust the myth that everybody buys everything on price because until we do, you won't see price as the lever for increasing profit.

Look at your own purchases - your clothes, your hair cut, your car, your lunch - can you think of anything you buy just on price? And why are you willing to pay more for other things?

Now look at your toughest competitor, the most hard nosed negotiator you know and do the same exercise. Can you see the evidence that they always buy on price?

I could write a lot about differentiating your product but I don't have the space. You need to see what you sell as different from your competitors so that you can persuade customers it is different. The Irresistible Offer is definitely worth reading (affiliate link).

To increase profit you need to move away from the price you charge to the value you provide and as you found with your clothes and car, value comes in many different criteria.

You may be self sabotaging your profits in your price negotiations. I hear it a lot when I am buying when the sales person says "my normal (or list) price is..." It tells me that there is room to negotiate and if I am buying, I want it at the lowest price.

Price is where the rubber of your business strategy hits the road and is a massive factor in your business profit. If you want to increase profit, you can't afford to ignore the increase price option.

On my Business Coaching Blog, I offer a free pricing report to help you make Better Pricing Decisions

Simpleology is the simple science of getting what you want.

Simpleology is also the training business created by best selling author and entrepreneur Mark Joyner.

There are some terrific resources available for free when you join Simpleology (join free of charge) including a great time management course - essential for anyone who wants to increase profit - and a copy of his book "The Irresistible Offer".

The offer is at the very centre of business and the book is highly recommended.

You can get it and join Simpleology at this link - Irresistible Offer.(affiliate link) You get the time management course on the inside. There is also a course to teach you how to manage money more effectively which you can try for $1.

Profit comes from efficient and effective systems and processes and I like the work they are doing with best practice process maps - or as they call them cashmaps. There is a growing range of these profit strategies and tactics and each comes with a free top level process map.

There are other more expensive and extensive courses available from Simpleology which will help you to increase profit but I recommend you start with the free and low priced materials to make sure the training methods suit your personal preferences.

I don't like the movie "The Secret" because it downplays the importance of taking action and implied that success was hocus pocus magic. I am intrigued by the idea of the Law of Attraction and whether it can help you to increase profits.

First I believe that profit comes from positive thinking. You have to see a profitable opportunity and have the confidence to grab it.

A business owner thinking about making losses rather than increasing profit is likely to reject the opportunity for fear of making the loss worse while a profit focused owner will see the opportunity very differently.

I found this playback of the Five Missing Secrets from The Secret very interesting and it answers many of the reasons why some people are successful while many are not. It also helps to answer why, if you have tried applying the law of attraction to your business profits, it didn't work.

If you can accept that part of the battle to increase profits is mindset related then you should take a look at this Law of Attraction training.

Profit is the difference between revenue (income or sales) and costs and because these numbers are usually much bigger than profit, small changes in revenue and costs can have a huge impact on profit.

Imagine a business which has sales of $1 million, a 30% margin and overhead costs of $280,000.

Sales $1000k
Cost of Sales $700k
Gross Margin $300k
Overheads $280k
Profit $20k

Let us look at what a 1% improvement in sales volumes, prices and costs will do.

A 1% increase in sales volumes will create $10k extra sales and $3k extra margin and profit

A 1% increase in price will create $10k extra sales and $10k extra profit

A 1% reduction in costs (total $700k + $280 = $980k) will create $9.8k extra profit.

Put them together and you get a $22.8k increase in profit - or in this case an increase from $20k to $42.8k - a 114% increase.

This is the power of continually and systematically looking for little improvements in these three drivers of profit.

Set yourself the target of doing one new thing every day that can increase your profit and as you do them, you should gradually see your profits increase.

Legendary marketing genius Jay Abraham is releasing his new book "The Sticking Point Solution" on June 2nd 2009 and if you pre-order there is a very special deal.

It is subtitled "9 Ways to Move Your Business from Stagnation to Stunning Growth In Tough Economic Times"

Order and more details on the Sticking Point Solution offer (affiliate link).

Your budget is too low for personal business profit coaching but the great news is that you can buy gold membership to Scott Hallman's Small Business Growth Club (affiliate link).

For real world businesses (i.e. there is no Internet related training), then this is the training program that I wish I had created.

If you are short of customers, the new business modules will teach you how to market so you attract the customers you want.

If you have customers but you don't believe you are getting as much business as you should, the Optimize Profits modules will teach you how to help your customers and earn more money.

Scott Hallman has worked with business gurus like Jay Abraham, Jay Conrad Levinson (Guerrilla Marketing) and Chet Holmes and before he turned to business coaching, he was an extremely successful entrepreneur.

Hi specialist focus is on implementation and he has taken many of the profit strategies you have read about elsewhere and turned them into an easy to implement system.

If you have the money, the Small Business Growth Club has my highest recommendation (affiliate link).

Just focus ion implementing the ideas and I am sure you will see your profits increase.

You need to be bringing the ideas of a number of business greats together. It is more work for you and you will need to integrate the ideas.

I suggest the following to help you to

1 - work on your mindset - to make sure that you don't have self sabotaging beliefs about making money.

2 - to attract new customers

3 - to increase profits from your existing customers

4 - to organise the role of your business in your life.

Mindset

It sounds silly to think that your mind may not be helping you to make money but I have seen it too often.

I recommend the Simpleology Law of Attraction course. This is the positive thinking aspects of the law of attraction plus an emphasis on action combined with help to control the subconscious self-limiting beliefs.

Attract New Customers

Sign up for the free trial of Dan Kennedy's No BS Marketing newsletter (affiliate link) - you have to pay shipping and handling - to see plenty of examples of lead generation marketing that works. Then learn to adapt the ideas to your business to help you attract leans that turn into profit.

Also get Mark Joyner's book The Irresistible Offer" (affiliate link) which is available for free and will help you to learn what attracts customers to a business.

It will also help you to define what your business really offers to customers and may give you insights into why you may have found it difficult to attract or keep customers.

Make More Money From Existing Customers

This is the area that Jay Abraham excels and his Nightingale Conant audio program The Mastermind Marketing System is inspiring stuff.

Organise Your Business & Life

MIchael Gerber and his ideas from the E Myth are great for helping you to see the business in the proper perspective - as something that you design to serve the life you want.

There is a Nightingale Conant program but I have not heard it (although I do own the much more expensive E Myth mastery program) so go for The E Myth Revisited book unless you are prepared to risk the audio and take up the very strong Nightingale Conant guarantee.

I haven't spent the full $500 so if you like the Glazer Kennedy newsletter, let that run for a few months to get more examples and ideas of how to attract leads.

This "How to increase Profit" page uses an accountant's view of profit as the effect of:

How much you sell

At what price

Less the costs you have

And gives you tips on how to work on these direct profit drivers.

For an alternative view about how to increase profit which I use in my business coaching see my Business Profitability page which explains my business development model - the Eight Pillars of Business Prosperity.

If you want to learn more about my ideas on how you can increase profit, and in particular about my business development approach called the Eight Pillars of Business Prosperity please click over to my Business Coaching blog and add yourself to one of the opt-in boxes for my newsletter.

As a reward I offer some excellent profit based reports including "Marketing Secrets For Small Business", "How To Win Profitable Business From Competitors" and Jay Abraham's "Windfall Profits Paradox"

Business Coaching to help business owners find hidden profit with low cost low risk strategies and tactics

My Business Coaching blog is packed with useful information to help you to increase profit.

Your Profit Coach is a trading name of Planning & Control Solutions Ltd, a company registered in England No 3897173
Registered office, 17 Beachburn Way, Handsworth Wood, Birmingham, B20 2AU

Copyright 2008-2009 Planning & Control Solutions Ltd

There are a number of affiliate links in the page above which means that if you click through and then buy, I am paid a commission.