A finely honed profit tool

You know the old story about Grandma's axe.  She'd had it for many years, still insisted on chopping the wood for the fire.  The axe was a good one, sharp, good balance, a strong handle. Grandma could really make the chips fly when splitting firewood.  And over her lifetime Grandma's finely honed old axe had had three new handles and two new heads.  But it was still Grandma's old axe.

Is your business a finely honed profit tool; finding customers, delivering them value, making good profit, and able to do so without stressing you to the max, while giving you plenty of free time to spend with your family.

Or is it a dull and blunt instrument, out of balance, bouncing of the timber it used to split with ease, and likely to give you splinters whilst using it?

You see businesses, just like Grandma's axe, need to be continually updated and improved if they are to continue to be an efficient and effective profit machine.

What makes up the handles and axe head in your business? There are at least five components I can think of:

Your marketing & sales tool: How long is it since you had a good look at your market, whether there were any changes in it, what the competition is up to?  And how long since you changed your approach to your market and updated your marketing approach and materials?  Are your marketing efforts still getting the same return, or do they need sharpening or replacing.

Your pricing tool: How long is it since you have reviewed your prices?  More importantly, how long is it since you reviewed how you set your prices?  So many small businesses set their prices by looking at their costs and adding a margin.  What has that got to do with value to the customer?  Sure, you have to know your costs to make a judgement about the gross margin needed, but that is only one aspect of the process.  The customer doesn't know your costs.  It's the value you add, the results you deliver that the customer is paying for.

Your production tool: Whether you peoduce a product or service, you need to deliver it as efficiently and effectively as possible, at the right time, place and cost.  Could you delivery process be sharpened?  Are there elements that could be replaced with something which does the job for you more quickly, with fewer errors or at a lower cost?  What are the constraints that could be holding back the value you add for your customers?  Are there gaps between your desired performance and actual performance?

Your administration tool: Your business administration, the office if you like, performs the critical task of enabling your production processes to work properly.  Without effective financial management, purchasing or HR, for example, what you do to create and satisfy customers just won't work as well as it should.  And if your administration is costing too much then the margin sales has to earn is higher, and the job is harder.  Are there gaps between your desired performance and actual performance?

Your processes and procedures: Have you ever seen professional axemen who compete at the local agricultural show?  They keep their gleaming axes in a special case.  The special case for your tools is the processes and procedures by which you use the tools above.  But it is only a protective case keeping the tools sharp if those processes and procedures are documented.  Because then they will be used the way they are supposed to be used.  To quote E-Myth author Michael Gerber "Do you ever wonder where the profits really come from?  It's your business systems that add value.  It's your business systems that create profit."

Like a good axe, keep your business tools sharp. Update and replace those parts that are worn and not performing and your business will be finely honed; finding customers, delivering them value, making good profit, and doing so without stressing you, while giving you plenty of free time to spend with your family.

© Copyright 2009 Adam Gordon, Profits Leak Detective

You have made changes, haven't you?

The only constant thing is change. An old saying, but not a trite one.  It's not trite because it's true.  You don't have to be reminded about the global financial crisis to know that.  Dramatic changes can suddenly imperil your business.  Gradual changes can cause it to leak away.

So what changes have you made to your business in response?

Let's start at the sharp end, with the customers; the people without whom you do not have a business.  They may not have changed as a target market but their expectations may have changed.  Their propensity to buy may have changed.  Their buying patterns, and frequency of purchase may have changed, as might the average value of their purchases.

Houston, we have problem.

So maybe the symptom of a problem causing a profit leak in your business is that there has been 'no clear improvement in the customer offerings over time'.

Let's face it.  You should be continually improving your customer offer no matter what the times. But when there is dramatic change the imperative is even greater.  Wait and see is not a strategy to maintain your profits.

It all comes back to value from the customer's perspective, the value package you are delivering them to meet the problem you are solving for them.  Whatever they are seeking it is driven by an underlying problem, be it cost saving, improving their operations, making life easier for them, improving their efficiency or whatever.

What could you do? Here are 7 ways to improve your customer offering.

1. 1.    Talk to them - yes, I know you do, but you need to get an even closer understanding of their situation, how the current climate is impacting on them, and their expectations, in order to improve your offering or the mix you offer them.

1. 2.  Offer an option of a downgraded package at a lower price. That doesn't mean slashing your price.  Take some features out so you can offer a lower price.

1. 3.    Balance that with an upgraded offer offering increased benefits, at a higher price. In other words, offer a variety of pricing options to increase your opportunity of winning over prospective customers.

2. 4.    Link your offer to a reason for it. People are more likely to buy when there is a reason for offering specials.  In recent times I've seen "Stimulus Specials", "Beat the Recession" specials, and in my part of the world, "Flood Recovery Specials".

3. 5.   Develop and offer a freebie that provides value. Try a free report relating to your area of expertise: how to save freight costs (trucking company), how to reduce your water bill (plumber), how to reduce the running costs of your car (auto mechanic), how to reduce your computer down time (IT business).  It needn't be long; a single page of dot points will do, as long as they are real.

4. 6.    Try at least one marketing medium you haven't tried before. You probably have a Yellow Page advertisement, and maybe a newspaper advertisement that you run regularly.  But have you tried a personalised sales letter (with one of the above offers), an email marketing campaign, a letter box or post office box drop, and on-line offer (as opposed to a boring on-line brochure).  I'm sure you haven't exhausted all the available marketing media.  And by the way, measure the results.

5. 7.  Be odd. Find something you can do to stand out from all the others they could be buying from.   Face it, there's no competitive advantage in me-too marketing.  Customers won't talk about you if you are just like everybody else.

Counter those constant external changes, whether they be dramatic or gradual, by continually improving your customer offer and you prevent a profit leak.

And if you would like a hand in developing any of these responses This e-mail address is being protected from spambots. You need JavaScript enabled to view it to see how we can help.

© Copyright 2009 Adam Gordon, Profits Leak Detective

Is this a good business!

Tidiness - an untidy business is usually a less than efficient business. If it is untidy they are unlikely to have good procedures and systems. Good procedures and systems underpin good businesses. Less than efficient businesses will be earning less than optimal profits. Poor systems may be hiding poorly performing areas of the business.

Waste - obvious waste in the office or operational areas? Where there's waste there is a profit leak.

The demeanour of the people - cheerful and happy people are at work suggest the business is probably a good place at which to work, and a good place to work is one that is working well;

Ostentatious and misplaced expenditure - money being spent on the wrong things. Expensive cars and front offices when it is obvious the operational areas need funding are always a clear sign.

Does your business ?

If your equipment requires regular maintenance to run properly do you also need to regularly maintain your business?

You operate equipment in your business, from vehicles to computers, and for many businesses, much more and complex equipment.  And you know that without proper maintenance the equipment will not run efficiently.  You also know the longer you leave maintenance the more likely something is to go really wrong and end up costing you real money.

"Improper maintenance can erode the bottom line of an energy management program. Dirty air filters add load to fan motors, and compressed air systems can develop leaks over time. Improperly tensioned and aligned V-belts can reduce transfer efficiency from 97% to 88% (5%).

While it's helpful to divide energy management programs into six basic elements, it's impossible for them not to be intertwined - and the benefits are cumulative. In the end, successful programs will drive all the elements with authority, and with the knowledge that the best return will come from a coordinated and sustained effort."

What would be the effect on your Nett Profit if your Gross Profit crept down by 5%?    Or if your overheads crept up by 5%?  The effect is considerable, disastrous in fact.  It would come straight out of your bottom line.  If you don't know see "Don't increase Sales - Increase Gross Profits".

Here are just some areas that might need regular maintenance in your business:

Poor communication of your product or service's unique benefits - if you can't clearly and simply say how brilliant and different your offer to customers is you will be seen as a commodity and have to charge commodity prices. My experience of many companies is that there is a great offer that could charge both higher prices and drive more volume if it was communicated more clearly and more compellingly.

Poor selling skills - sales are the lifeblood of business, and those who can get great win-win deals will do better over the long run than those who "settle" too early. Are you leaving money on the table because you are over anxious to get to 'yes'?

Poor procedures, processes and systems - if you don't have good efficient systems and procedures, then chances are you're leaking profits somewhere along the line. Could yours be better?

Did you nod and say yes to any of these? A little regular maintenance will make a significant difference to your nett profit.

BTW the last four newsletters to subscribers have been providing tips on improving the selling process. Subscribe, send me an email and I will forward you copies.

Misguided measurements misinform

Uncertainty causes fear

Recent events bought an earlier Profits Leak blog to mind. I wrote of the typical small business who concentrated on the job in hand, getting it right to make sure they make a profit, then moving on to the next job.  They believed that's all that is required to build a business.   After all, there will always be a job on hand, and one to follow it.  Life goes on.  Nothing much changes.

They couldn't see the risk their lack of marketing placed on their business.  They relied almost entirely on word-of-mouth and repeat business to sustain them.

Because as you now well know, things do change.  And the change can be dramatic.  That earlier article pointed out that lack of marketing caused problems such as a lack of control over the future direction of your business.  You are completely dependent on what comes through the door.

What bought this to mind was the sudden conversion of two clients, clients who in many ways typify small business operators.  They are good at what they do, have good reputations, and for much of the time business has kept coming through the door.  Life goes on.