All businesses need to make profits to survive. Most businesses look to increase profits over time. Poorly managed businesses think that constantly planning to increase turnover will increase profits. We need to look at how to effectively increase profits.
Put simplistically, PROFIT = SALES – COSTS. In a purely mathematical world the way to increase profits is simple, increase sales or decrease costs. There are however, a number of problems with this formula and simply having a sales and / or costs policy.
Increasing sales has a number of problems. If we increase selling price then volumes will fall. If we decrease selling price we will sell more but will we sell enough to increase profits? We may be able to do that in the short term but there are limits to how much we can sell of any particular thing.
Reducing costs is the easy option in the short term and the one to which many poor managers turn. Of course we should monitor costs and ensure that money is not spent unnecessarily, but there is a limit on where and by how much you can cut. Many businesses, or to be more exact their staff, are at breaking point because they have made too many cuts.
So, you cry, if fiddling with sales or cutting costs does not work in the medium to long term how can I effectively increase profits?
What so many forget is that sales are a reflection of the value of what you provide to your customer. The reason that so many businesses complain that they lose business on the basis of price is simple. Their customers do not see any extra value in what they do compared with the cheapest version of whatever it is. Selecting customers to whom you can add value and then adding it will increase sales value, protect margins and increase profits.
The value of a bottle of water to someone standing next to a water fountain is close to zero. the value of that same bottle of water to someone who is stuck in the dessert and has not had a drink for three days is almost beyond measure. Same product, different customer, different circumstances. Following on from that, tap water and bottled water are essentially the same thing – a drink of water. However, every day, thousands of people pay a fortune for bottled water at service stations when they could have just filled up a bottle from the tap at home for free, before they left home. Same person but a different customer, placing a different value on the same product in different places.
The secret to how to increase profits effectively is add value. To add value you must pick the right customer in the right situation and then concentrate on adding that value. Simple price and cost exercises are not effective. Add value, add profit and make it more difficult for the competition.
Sit down and ask yourself, “what value do we bring to our customers over and above that of the competition?” If you can’t answer that question then you can bet your customers can’t either. If you can answer it then ask “how can you increase that value?”
Now pass me that bottle of water please, I’m off to the Sahara to sell it!!!
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