Your CEO asks you on how to maximize profit. What do you do? Our first tip, find your profit levers.
How to Find Profit Levers
If you are a program manager, a client manager, or a department manager, your profit levers may be fairly apparent. Start by obtaining financials for your responsibility. At minimum, you should have revenue, variable costs, and fixed costs.
Additionally, you can get costs such as labor. You can also get labor-related costs like fringe benefits, direct costs, and perhaps, some pooled costs. Moreover, you can obtain the calculation of profit/loss and the profit/loss percentage. You may also see the company applied overheads, general expenses, and administrative overhead expense applied for grand totals.
How to Maximize Profit Using Profit Levers?
So, what are profit levers? Typically profit levers are all the elements that add up to revenue or costs that if manipulated can impact profitability.
High profit lever
Your program/client level financials should indicate the high profit clients. If you are managing a single program, then you will want detailed financials to indicate the product/service mix being purchased and the associated costs. Find the high profit clients and high profit product/service mix. Make sure these clients are getting the best your company can offer such as flawless service and highest priority.
You can maximize profit by increasing revenue. Profit levers for revenue include price of the product or services, price of options and bundled or unbundled services, volume or quantity, value proposition and market perception. Market research from AMR Research has shown that a 1% increase in price can improve profits by 11-12% while a 1% increase in volume can maximize profits by 3-4%.
Clearly reducing costs of labor, labor fringe benefits, direct costs, subcontracted costs, and other variable costs will maximize profit. The AMR Research data suggests that a 1% reduction of costs will yield maximize profit from 8-9 percent. Find a cost lever you can reduce and try it, for instance labor costs or shipping costs. Then find another and track your progress.
Graphic Illustration on How to Maximize Profit
The graph below depicts the yield in profit with a 1% improvement in price, cost and volume.
Marketing and Sales Team Work to Maximize Profit
If you’re a solopreneur or small business, marketing and sales are one and the same thing. As your company grows, the work starts to get divided up. Marketing focuses on building brand awareness, stimulating interest, and generating leads. Sales works to turn prospects into paying customers.
Because sales people want a sale now, and marketing is working to build long-term brand equity, the timelines, goals, and outcomes are different enough as to make the teams basically ignore each other at best, or work against each other at worse. They are both friends and rivals. In a word: frenemies.
But Sales and Marketing share the same goal: increase revenues. Nothing else matters. As a company, there are 4 main ways to increase your revenues.
1. Increase your number of paying customers
2. Increase the quantity of goods or services a customer buys per transaction
3. Increase the price per transaction per customer
4. Improve retention rates of existing customers and increase the overall number of purchases they make with you over time
To achieve these, Sales & Marketing must bury the hatchet of frenemyship and become Smartketing. To achieve this level of nirvana, the two teams must sit down and define the customer lifecycle, mapping the major points along the timeline:
This enables both teams to know exactly where they stand in terms of increased revenue today, next week, and 6 months down the road. They can better forecast where they’ll be, identify chokepoints in the process that cause lost revenues, and work more closely together towards goal achievement. In the next post, we’ll discuss more about these goals and how to measure the impact of micro-conversions in the customers buying journey.
Later, I will show how the profit quadrant can visualize your data and steer you towards a course of action and help you find the highest impact profit levers so you can ultimately learn how to maximize profit. Get better insights into your business today.