The Three Levers of Profit
In any business there are 3 levers of profit. Knowing what the levers are, and how to pull them will help you to maximise the profits in your business.
Lever 1 - Price
Increasing prices has a direct impact on a businesses bottom line.
To increase profits, consider whether you are charging enough for your products/services. But don't just look at the costs you have to cover and what your competitors charge, consider it from your customers perspective.
How much value does the customer receive and are they willing to pay more?
Lever 2 - Volume
If you can increase the volume of sales in your business, profits will increase too. Part of this will be from simply selling more. However, you will also increase profits by achieving greater economies of scale. Ie your cost structures become more efficient and this means more profit for your.
How can you encourage existing customers to buy more and how can you attract new customers?
Lever 3 - Costs
Reducing costs results in increased profits. Pretty logical really.
Profitable businesses are always looking at ways that they can reduce costs by either reducing waste or by paying less for their business inputs.
The best spot to start is with direct costs. These are the costs that relate directly to your products/services. If you can reduce these costs, you will get a multiplier effect and save significant sums of money.
Eg if you run a cafe that serves 500 customers a week, and you reduce food costs by 50 cents per customer, you just saved $13,000 per annum.
You can then look at your fixed costs and for savings.
Just make sure that your cost cutting doesn't negatively impact on your products/services or your ability to attract customers.
Pull all the levers
If pulling one of the levers of profit will have a big impact, consider the impact of pulling all three at once.
Back to the cafe example. If the average spend per customer is $20, direct costs are $8 and overheads are $200,000 per annum, the P&L looks like:
If you can increase prices and volumes by 5% each, and reduce direct costs by 5%, the P&L now looks like:
That small 5% change results in a big $53,820 increase in profit. Or in other words, profit has increased by 48%.
Would you like to see that sort of improvement in your bottom line?
If the answer is "yes" (i'm assuming it is!), then you had better look at pulling the three levers of profit.
Can you justify a price rise for some, or all, of your products/services? How can you ramp up efforts to increase volumes? Can you find a way to save on costs?
If you want to pull the levers but can't figure out how, enlist help. It is often the eye of an outsider that spots the opportunities to make profitable changes in your business.