It may sound like a trick question…
Can a business increases its sales generating capability by 10%, keep expenses constant and still see a 61% increase in profits? It can if it looks at profit generation the ActionCOACH way.
Conventional business looks at sales from the standpoint of three variables, namely sales, expenses and profits defined by the formula: Sales – Expenses = Profits. In this approach, each variable depends on the other, forcing businesses to look at either increasing sales or decreasing expenses in order to influence profitability. ActionCOACH moves away from this narrow view and breaks the profit generating variables into five separate components. These variables can be worked individually and across the board to leverage profits on the bottom line. In the ActionCOACH business model, this is termed “The Five Ways.”
According to the “Five Ways,” all business is driven by five key profit generating areas: Lead Generation, Conversion Rate, Average Dollar Sale, Average Number of Transactions and Profit Margins. These areas are highlighted in the following equations:
Lead Generation x Conversion Rate = Average Number of Customers
Number of Customers x Average Dollar Sale x Average Number of Transactions = Revenues
Revenues x Profit Margins = $ Profits
A closer look at each of these five variables reveals how an increase in any or all of them can increase sales and profits, while keeping expenses constant.
Understanding Lead Generation, Conversion Rates and Average Dollar Amounts
In today’s highly competitive business world, it is rarely the case where a business owner can just sit back and see the profits roll in. It becomes vital for businesses to test and measure everything. A good place to start is lead generation. This is defined as the total number of potential buyers that indicated interest, inquired or reached out to the business. Leads are also known as ‘potentials’ or ‘prospects.’
Most people confuse responses, or the number of potential buyers, with results. The sound of ringing phones does not mean that the cash registers are ringing as well. This is explained by conversion rate, or the percentage of people that did buy versus those who could have bought. An example of this is 10 people walking through a store with three people buying something. For the day, the store had a conversion rate of 3 out of 10, or 30%.
Using the ‘Five Ways’ model, the number of different customers a business has is obtained by multiplying the total number of leads by conversion rate.
As these customers conduct a certain number of transactions at a certain average transaction $ value, the business realizes a certain level of revenue over the course of a year. To maximize number of transactions it helps to keep a database of past customers, to regularly follow up with them and to deploy loyalty programs. The average sale of each purchase can be increased through pricing with base and option schemes, by bundling offerings and by providing checklists to buyers to alert them to other related items they might need to complete a job for example.
Discovering Revenues and Working on Margins
At a certain level of revenue a business owner earns a level of profit determined by the expenses incurred in running the business and consummating sales. This leads to the concept of margin, which is the profit percentage of each and every sale. Simply put, if a business sells something for $100, and $25 was profit, the profit margin is 25%.
The innovative idea around the “Five Ways” is that businesses can leverage the concept even if they have a product or service with a long-term buying cycle or a limited number of transactions. In these cases, a business could work with the other variables to improve bottom-line profit, including boosting its marketing efforts to capture more qualified leads, finding ways to increase conversion to customers, raising prices to leverage average amount sale or improving profit margins. By implementing the right 5 Ways strategies, a business owner can optimize each part of the equation and drive substantial improvement in profits. By simply improving performance in each of the 5 ways elements 10%, a business can realize a 61% increase in profits:
Lead Gen. (x1.1) X Conv. (x1.1) x # of Trans. (x1.1) x $ per Trans. (x1.1) x Margin (x1.1) = 1.61
By stepping outside the conventional accounting perspective of profit, and recognizing that a number of additional variables drive the bottom-line – ActionCOACH gives owners a new perspective on business. This new perspective, the 5 ways model and related strategies, equips them with the tools that positively impact each variable of the equation … and can yield massive improvements in bottom line profitability.
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