What are Profit Levers?
Your CEO asks you to increase profitability. First, find your profit levers. If you are a program manager, a client manager or a department manager your profit levers may be fairly apparent. Obtain financials for your responsibility. At minimum, you should have revenue, variable costs and fixed costs. More detail could include costs such as labor, labor related costs such as fringe benefits, direct costs and perhaps some pooled costs and the calculation of profit or loss and maybe the profit or loss percentage. You may also see the company applied overheads and general and administrative overhead expense applied for grand totals. 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.
Revenue Lever: You can increase profitability 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 improve profits by 3-4%.
Cost Levers: Clearly reducing costs of labor, labor fringe benefits, direct costs, subcontracted costs, and other variable costs will improve profitability. The AMR Research data suggests that a 1% reduction of costs will yield an 8-9% improvement in profits. Find a cost lever you can reduce and try it, for instance labor costs or shipping costs. Then find another and track your progress.
The graph below depicts the yield in profit with a 1% improvement in price, cost and volume.
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.