Any sale is a good sale, right!
But is it? Not all sales will give the same return, and for a small business, profitability is not optional.
How can this be so?
One guru states that businesses succeed because of high sales, that business starts with a sale.
How could you argue with that. Without a sale there can be no cash flow, but that doesn't mean profits. A sale just means you have cash coming into your business, and cash going out. A sale doesn't mean you are making profits, or at least sufficient profits.
As we said above, not all sales give the same return. Let's look at some scenarios where this could occur, but before we do there is an underlying assumption. Most small business owners and managers are pretty busy. They don't have a whole lot of spare time they can devote to other areas. Something has to give if they are to optimise the profits for their business.
Not all market segments are as profitable as others - do you know the profitability of each market you are servicing? If you don't it is always a very illuminating exercise to work it out. If you do, and there is some variation should you be concentrating on those niches which give you greater returns? There are riches in niches.
Are you selling at less than optimal prices - so often a sale is made with money left on the table? Do you price your products on the value you provide to your customers, or on cost plus a margin? So many businesses undervalue the product or service they provide because they don't understand their value. To what extent have you differentiated your product or the experience you provide your customers? Your costs may have gone up, but have you passed them on to your customers.
Are you concentrating on a ‘cash cow' and ignoring a ‘star'? You probably know these terms. Cash cows are markets which can be milked with very little effort. They may be large but they are static, and competition has largely left them. Easy money, but no long term future. There may well be a star in your market place, a segment with both great growth and profit potential. While you are milking the cash cow you may be missing out on the star, and the future.
We've always done it this way, this is a traditional market for us - any time you hear a statement like this, warning bells should ring. The last time I looked, the world, and the marketplaces have kept changing. And they change with increasing speed. Just think of the different types of printers you have hooked up to your computer over the last few years. If you are going to stay in a "traditional" market, you had better make sure your margins are good, very good.
Why is this a problem?
If you want your business to be sustainable, that is if you want it to be on-going and able to sustain the inevitable downturns that occur then you need to optimise profits, not sales. Concentrating on sales and not profits has an opportunity cost.
The opportunity cost is the cost you incur in making the less than optimal sale against the profit forgone from the more profitable opportunity.
People often do this when they are worried about where the next job may come from. "I don't know where the next sale will come from!"
All the time and effort you are putting into your business has to be replicated again and again if the sale is not leaving behind sufficient profits. It is a profit leak and needs to be recognised as such. The case study on our home page (http://www.profitsleakdetective.com) is a perfect example of the change that can be achieved by concentrating on the more profitable activities and letting go the less profitable.
There is a second consideration. Even if you are on the right track you can still be overtaken by your competitors. If your competitors have deeper pockets because they are making more profitable decisions, or if they are working on the ‘stars' while you are milking the ‘cash cows' they will come to dominate your market place, at your expense!
So what can you do about it?
Optimising the profits for your business, as opposed to optimising sales, can be done, but a little work is required. And you must have some information, and knowledge.
Here are four things that as a business owner or manager you can do:
Understand your market place - Remember that opportunities and threats come from outside your business. You need to have a very good understanding about what is happening, what are the changes, where are the cash cows, and the stars.
Understand your market segments, very well - do you have a clear idea about what makes up your customer's value equations? It is rarely only price, but what are the additional factors what will allow you to charge a price commensurate with that equation.
Take a helicopter view of your business - lay out a profitability map. Do you know the profitability of each of your activities, at least down to the gross profit level? Once you know that and can see a profitability map, optimisation becomes much easier.
Heed the warning bells - ‘we've always done it this way" should be a warning bell to re-examine a traditional market or approach to a marketing activity.
Overcoming the fear of the impact of a price rise is easy, at least in hindsight, once you've done it. Just do it, raise your prices by whatever you are comfortable, plus a little. As the best boss I ever worked for said, when the sales team were shivering at the perceived impact of a price rise on their customers, "They can always stand a price rise". And he was right.
Optimising profits not sales can be done
But you will need some information, and to apply the information in your market place. Then you will see the difference.
So don't just take any sale. Take the sale which is going position your business for a long term sustainable, profitable future.
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© Adam Gordon, Profits Leak Detective