The Profit Matrix for Business – Part 2
by Brian Nagele
Improve your profits in 5 steps
In the easy terms of “Thanks Captain Obvious”, to be profitable you need to bring in more money than you spend. If business was that easy, we would all become the spreadsheet millionaires we forecast in our original business plans. So why did your business plan seem like a no brainer and now its hard to break even? It usually comes down to a few factors…
- You are not hitting your sales forecast (customer acquisition)
- Your customers are spending less than anticipated and/or not returning (customer retention)
- You’re margins are off (sale price vs cost of service/goods)
There is a formula behind every success story. I call it the profit matrix. There are 5 areas you can improve to increase profit for your business. Knowing the numbers and how to improve them is the key to becoming a cash cow. The profit matrix in simple terms is:
(2) x Conversion Rate
(3) x Purchase Frequency
(4) x Average Spend
(5) x Margin
= Gross Profit
(Please note that Part 1 is generating leads, and Part 3 is taking Gross Profit – Overhead = Net Profit. We’ll visit these in another post)
We need to choose a period of time to gather the data and figure out the formula for your profit matrix. It could be a month, quarter, year. It depends on your business and how you collect data. I’m going to use an example below for a period of one month
*There is a link to a spreadsheet you can copy at the bottom of this page*
Period = 1 Month
What does it all mean???
It hopefully means you have the right data and now you are looking at it to determine where you are in the matrix. In the example above, we had 100 leads, converted 10% of them into paying customers, each customer bought once in the month at an average of $100 per purchase, the sales were $1000 and the margins on the goods/services we sold were 30%, so the gross profit is $300.
Lets manipulate the data to see how we can increase profits even if we only increase a few of the lines a small percentage.
Leads – Can you increase your leads by 20% per month? I bet you can. *See Profit matrix Part 1 – Lead Generation
Conversion Rate – Can you do a better job converting your leads to customers? Of course you can.
Frequency – Since this example is one month, you may or may not be able to get your customers to purchase once more each month. Thats ok, leave it the same if not.
Average Spend – Can we increase prices by 10%? I had a bar owner friend scared to death of increasing prices, but he let me convince him to raise every thing on the bar menu by $0.50 cents. None of his customers noticed, but we noticed the profits after a month.
Margin – Can we reduce costs of service / cost of goods? My bar friend above lowered his liquor costs by purchasing liters instead of 750ml bottles. Buying in greater volume packaging lowered the per ounce cost of the liquor therefor increasing his margins.
Lets take a look at our profit matrix if we increase leads, conversion rate, average spend and margin by 20% across the board.
Wait, did we just double our gross profits???
Yes we did. By increasing leads, conversion, avg spend and margins by only 20% each, we effectively doubled our profit for the period. I could write a post about each line item and the tactics to increase each one. Its sometimes tough to see your business when you are working in it.
For now, play with the shared google sheet I created at the link below. Enter your numbers in the green cells. The red cells have formulas already programed. Start with your actuals in scenario 1 and increase them in scenario 2 & 3. You don’t always have the ability to increase all lines and that is ok. If you can improve two or three of the five, you are moving in the right direction.
Go for the low hanging fruit at first. Maybe you can respond faster to leads and increase conversions or develop a better incoming phone script/process. If you improve your SEO or runs targeted ads, you can increase the volume of leads through conversion rate optimization. Requests quotes from a few different suppliers to lower cost and increase margins. Raise prices by 10-20% for new customers.
Everything in business is a recipe. If you get the ingredients and process right, you will be successful. It just takes practice and learning to improve each day.
Access the google sheet of our profit matrix so you can make a copy and use for your business.