The Profit Growth Formula

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Here are 5 ways to DOUBLE YOUR SALES and TRIPLE YOUR PROFITS in the next 12 to 24 months.

Overview of the Formula

Okay, so up on the whiteboard here, I’ve written out the formula. It’s a formula we use with all of our clients to help them grow both their revenue and their profitability. We simply call it the Profit Growth Formula.

First of all, what I’ll do is I’ll explain how the formula works, and then I’ll take you through some examples on how we actually use it to grow the numbers in our clients’ businesses. All right. To help explain the formula, I’ve put some numbers in here and I’ll take you through those numbers as I take you through the formula. Okay, so the formula’s pretty simple.

A business generates a certain number of leads every year. Those leads times a conversion rate, a sales conversion rate, gives you the total number of customers for the year. In this example, we have a business that generates 4,000 new inquiries or leads every year. It converts 20% of those into customers, so that gives us 800 customers every year. We then take the number of customers and we multiply it by an average sales figure, the average sales value at each transaction, and we multiply that by the number of transactions every year, so how many times a customer comes back every year. In this example, we have 800 customers times $200 every time, a $200 spend every time they transact with the business. They transact twice a year and that gives us a revenue figure of $320,000. All right?

So then what we do is we take this revenue figure, we multiply it by a net profit margin, and that gives us the profit for the year. That’s fair enough, I suppose. In this example, once again, the business does $320,000 worth of sales every year. It has a 20% net profit margin and that gives us a net profit of $64,000. All right, so that’s fairly straightforward. I mean, that’s just maths. But the important thing about the formula is the items in blue versus the items in red.

How to Use the Formula

Most businesses and most business people want to focus on the items in red, which is fair enough. They want more customers, they want more revenue, and they want more profit. But they’re the areas that … We actually encourage our clients not to focus on those specifically, because they’re actually the result of the other five areas, the items in blue. As you can see, now these are all equal signs, so they’re the results of the other five areas. I’ll just label those five areas. One, two, three, four, and five.

And so what we get our clients to do is to focus on improving small improvements in each of those five areas instead of just trying to grow customers without really breaking it down. What I’ll do is I’ll explain now how just a small improvement in each of those five areas can give you massive improvement in your revenue and in your profitability.

Using the Formula to Double Your Sales and Triple Your Profits

All right, so what I’ve done in this example … Bear with me. I know there’s a lot of numbers now on the board, but I’ll explain it all to you. What I’ve done is taken this base case, which we’ve just been through, and I’ve increased the blue items, these five areas, by 25% each. So it’s not a big increase and it’s not something we would expect you to do in six months. It’s something which we work towards. Every quarter, we focus on helping our clients improve some of these five areas by a small percentage. It could be 5 or 10% every quarter. Over 12 to 24 months, the focus is achieving an average growth in each of these five areas of, say, 25%.

1) Leads. All right? Let’s explain how this works and what the result is. If we increase leads by 25%, that takes it from 4,000 to 5,000. All right? So over a couple of years, that’s not a big increase. Instead of getting 4,000 inquiries and leads every year, we’re now getting 5,000.

2) Conversion Rate. The second part, conversion rate. Now, we don’t add 25% to this. We take a quarter of 20, which is five, and add that 5% to get to 25%. Okay? Over time, we improve sales process, and we’ve got a whole range of strategies to do that. We improve the conversion rate using different techniques to go from 20 to 25%. What that does, if you multiply that out, that then results in 1,250 customers a year instead of 800 customers.

3) Average Sale. Then, what we do is we obviously look at how do improve the average dollar sale. In this case, we’ve increased it by 25% from 200 to 250. They could be things like, you know, you could increase your price. You could repackage and bundle products. There’s a whole range of things you can do. Once again, it depends on the business. If you’re a retailer, you’ll use certain strategies. If you’re a trades person, you’ll use different strategies. Okay?

4) Number of Transactions. Then, we also want people to come back more often. In this example, once again, a 25% increase from two on average per year to two and a half times a year. Once again, it’s not a big increase over 12 to 24 months. Some strategies there we might look at is … Database is very important. Communicating more regularly. Having other ways to get people, encourage them to come back more often. It could be also introducing new products and services. There’s a whole range of things we can do.

Now, if we multiply that out, 1,250 customers times $250 times 2 1/2 times, we get a sales or revenue figure of $781,000. All right? That’s actually about 2.4 times. All right? That’s more than double the sales of where we started. You can check all these figures yourself and do the sums.

5) Margins. Then, the next step is margins. We then focus additionally on improving the margin. In this case, once again, a quarter of 20 is five, so we increase this from 20 to 25%. Once again, there are a range of things. It could be pricing, it could be looking at efficiencies amongst your staff, your operations, looking at better buying and reducing expenses in certain areas. So there’s a whole range of things we can do to improve the productivity, the efficiency, and the cost base of a business.

If you, once again, multiply that out — so $781,000 worth of revenue times 25% profit margin — gives you $195,000 of profit.

The Power of the Formula

If you compare where we started and where we’ve finished, that is about a three times profit increase. It’s amazing how powerful this formula is. Feel free, go ahead and check my numbers. But just by focusing on small improvements in each of those five areas, you get a massive increase in your revenue and your profitability. All right, so now, we’ve got some tools. We’ve got a checklist and a whole range of strategies that we can use to increase each of these five areas. As I said, it depends on the business. We’ve been doing this for over 10 years and we will implement and recommend different strategies for different types of businesses, different types of industries, and also the different types of the team makeup and all sorts of things.

If you do want a hand with anything, just give us a buzz. In the meantime, use the formula, have a think about strategies that you can do to improve each of those five areas. All the best and we’ll hope to speak to you soon.


By Anil Puri

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