Business musings

Articles and thoughts about profit

01
Feb

I went to the Barclays ‘Let’s Talk More Profit’ seminar in the latter half of last year and have been meaning to post this blog for a while. Robert Craven, author and consultant, spent half a day talking to around 200-300 companies about how to increase their profits. I found it really useful and practical, so thought I’d share the key message.

There are only 5 ways you can increase your profits…
and not all of them are created equal!

Here are the only 5 ways you can increase your profits:

  1. Raise your prices
  2. Lower your direct costs
  3. Fix the underperformers
  4. Increase volume
  5. Lower your overheads

And the winner is…

We looked at each of the five methods of increasing profit, and looked at how effective they each were. In reality, increasing your prices is by far the most effective way of increasing your profits.

Let me give you an example:

If you sell a widget at £100, with a cost of sale of £70, this creates £30 gross profit
However, if you reduce the price by just 10%, and sell it at £90, with the same cost of sale of £70, this only creates £20 gross profit.

Therefore, you would have to sell 50% MORE widgets just to make the same amount of profit you had been previously.

So, raising prices has the opposite effect. Sell at £110, less cost of sale £70 = £40 gross profit. A 33% increase in gross profit.

The counter argument is that, based on the supply and demand curve, you would expect to sell fewer widgets if you are charging a higher price, therefore making less money. The bit about selling fewer is true; the bit about less money depends on the demand curve. There is more profitable flex in this than you might imagine.

Say you sold 100 widgets at £100 making a total gross profit of £3000 (£30 profit on each widget x 100), then increased your prices to £110. You would now only need to sell 75 widgets to make the same profit (£40 profit on each widget x 75 =£3000), resulting in less work (and therefore overheads) for the same amount of money.

In addition, it is likely that your ‘worst’ customers are also the most price sensitive and will take up the majority of your time.

So, let me put it this way…

If you would like to work less, earn the same, and get rid of your least favourite customers… consider putting your prices up!

You can then spend the time you have saved looking for new, higher paying customers. When you have found these new customers and returned to selling 100 widgets, you will now be making £4000 profit instead (an extra £1000).

The only proviso is to be aware of demand sensitivity: if your business’ particular demand curve is very price sensitive (for example, if you were raise to prices by 10%, you would lose over 25% of your customers) you will then end up making less money, not more. That said, this sensitivity may be counteracted by upgrading your branding, customer service, or product/service differentiators to justify the price increase and thereby retain more existing customers. Raising your prices might mean raising your game, but then when has that ever been a bad thing?!

And finally, what about the other 4…?

The other 4 listed above are also very valid. Robert Craven suggests you work down in order, from 1 to 5. Implement each element and then move onto the next. By working in order, you ensure that you start with those that will have the most impact on your business’ profitability.

So, why not consider giving it a go!

10
Jul
Posted by Matt Stocker, stored in: Vision, Values, Purpose & Mission  

Profit is an output, not a purpose

A business must have reason to exist beyond that of making money and maximising shareholder value. Profit cannot be the goal, vision, or the purpose of an organisation. An organisation that posts great year end results doesn’t automatically earn the title of being a great company.money_house_small

Seeking profit as a primary business purpose is like building a house of cards or building a house on sand – it will eventually lead to collapse (ably demonstrated by many financial institutions over the previous months). Profit is too temporary to guide a business by.

If a business’ main purpose is to make a profit, this will both lead to a lack of strategic direction and reduced staff motivation. For employees, once they have earned the company enough to cover their salaries, they make money for the owner of the business. That’s not a real purpose!

6 good reasons not to use profit as your primary purpose

  • Profit is an output and a symptom of success, not the cause.
  • Profit is temporary and can be wiped out in an instant.
  • In tough times, profit can be hard to come by.
  • You need more purpose than profit to make it through.
  • Profit doesn’t motivate the salaried staff who make success happen.
  • Customers don’t appreciate being seen just for their revenue.
  • Consumers are increasingly focusing on values and contribution to society when choosing who to do business with.

Beyond profit…

A true vision for a business rests on foundations of both purpose and values. The people within the business have to be passionate about what they do and why they do it. The business’ goals must then align with this foundation. Without a clear foundation, a business will never be truly strategic.

Values

A business’ core values are defined internally through a process of introspection and discovery, and are based not on the outside but on what lies within. Core values do not change with the seasons but are deeply held values already embedded within the DNA of an organisation.

To give you some examples, core values held by a variety of well-known organisations include: imagination; product excellence; great customer service; respect for the individual; quality; market focus; teamwork.

Your organisation does not have to hold these values but will need to discover its own. Core values are the handful of values that, even when push comes to shove, your business is not prepared to sacrifice to get ahead.

Purpose

The core purpose of a business is also discovered by introspection and discovery. A business’ core purpose is its most fundamental reason for being. By stripping away the layers of what a business does and what motivates it, any company will discover a deeper purpose that unifies and motivates. In essence, to discover your business’ core purpose, you could ask, “Why does this business exist?”

Again, to give you an example, the core purpose of my wife’s tutoring business is to “Help people realise their full potential.”

Why does your business do what it does? What is the bottom line about why you make the products you make or deliver the services you deliver?

6 good reasons for your business to look beyond profit

  • Purpose and values motivate and unify management and staff.
  • Purpose and values give a company a solid foundation from which to make decisions.
  • Purpose and values provide a navigational compass to all elements of the business.
  • Customers will have more to buy into and engage with.
  • Purpose and values encourage loyalty of both staff and customers.
  • Purpose and values encourage a strong culture and ethos within a business.

What next?

Start working on it! You need to involve staff and managment alike and discuss and argue over what the key values your business does (or should) hold and what, at the end of the day, your business is about. Look beyond what it does. In challenging times such as these, going back to basics and understanding the bottom line foundation of your business may well be the thing that gets you and your staff through.

If you would like support through this process, then please contact me. You may also be interested in my workshop, Vision, purpose & values: a solid foundation.

Many thanks go to James Collins and Jerry Porras, whose work provided the foundation for this article: Collins, J.C. & Porras, J.I. (1996), Building Your Company’s Vision, Harvard Business Review.