Profit is a crucially important subject in business. The first thing you must appreciate is key profit drivers. This article should serve as a precursor to a discussion on how to drive up your profits. How can you even know where to go if your financials are messed up? It matters to keep well-structured financials. That way, you can properly assess your situation, knowing exactly what to pay attention to. Today, let us talk about key profit drivers to consider in business. Profit drivers are internal and external factors that influence or determine your business’ profitability.
Key Drivers To Boost Sales (And Enhance Profitability)
The truth is there are countless possible drivers behind sales and profits. Given the circumstances and time you intend to increase your profits, you would have to be specific. Take it contextually, as your scenario is seldom like that of others. You must strategically plan by figuring out what applies to you in particular. First thing, what is your current profit margin? This has to be as accurate as can be, and this is only possible if your financial records are up to date. Secondly, your customer retention framework must be well-structured. What is it currently like and how can you improve it – it is a key driver.
Thirdly, consider the average value your customers are putting into the business. There are always possibilities to increase that value by nudging the customers to spend more. The fourth driver is customer acquisition. How are you currently targeting, generating leads, and converting them into loyal customers? By looking into that, you can figure out ways to enhance your customer acquisition efforts. In summary, the key drivers that you must closely examine are:
Current Profit Margins
Customer Retention Framework
Customer Lifetime Value
Customer Acquisition Approaches
To better understand these aspects, you can read an article on customer retention metrics to track. As you can see, the centre of it all is customer retention but it is multi-layered. Let us look at those 4 key drivers in more detail by breaking them down as follows:
Operating Costs And Prices
Here your core drivers are your prices and cost structure. The two work hand in hand and have bearings on each other. Costs are broadly variable and fixed in nature. By reducing your costs or expenses, you can drive your pricing down. That will make your products or services preferable; customers typically want stuff to be affordable. For your gross profit to go up, you have to choose between reducing costs and increasing prices. The former is usually the best route since price hikes tend to push customers away. These are no doubt the key drivers of profit, but there is more.
Your value proposition is what you offer to your customers, be it goods or services. Their composition and quality are key determinants of whether or not people will buy. If they are lacking and of low quality, then little to no sales are expected. Customers need goods or services that consummately address their problems. One way to boost your value proposition is to make it unique. That is why prospective investors are often interested in hearing your unique value proposition. What is it about the stuff that differentiates you from everyone else? Let us suppose your value proposition is not that unique; is it superior to others? That is how crucial your value proposition is. Its composition and quality should be unique and or superior.
Profit does not just fall from nowhere; it starts off with sales. In order to get sales, you need to have people interested enough to buy. It should not stop there, though; they should become repeat customers. It will increase the chances of word-of-mouth marketing and referrals. Customer satisfaction is at the genesis of all this; otherwise, sales will never take off or stagnate. How you handle or manage your customers is the key driver of profit. It is all about building, nurturing, and sustaining relationships with them. It matters how you reach out, generate leads, cultivate them from prospects to repeat customers, and how you engage with them in the long run.
Yes, a business is, in a way, as good as its customers. However, it is also as good as its staff. Most businesses overlook the core role human resources play in driving profit. The customer relationships we just spoke about are a function of the staff. The value proposition is also tied to staff in many ways. Do your staff members have the necessary skills? Does your business have a healthy culture or operating environment? Are you paying them well? All these and more make human resources such an integral driver of profits in a business.
Standard Operating Procedures (SOPs)
A business must have SOPs; many do not. Sadly though, however you do your things, even if it is haphazard, are operating procedures. The ideal thing is to come up with standard operating procedures. That way, you can actively tweak your productivity any way you want. Having SOPs also makes it easier to come up with creative and innovative ways of doing things. This will ultimately make positive contributions to profitability.
Now you have an appreciation of some of the core internal and external factors that influence or determine your business’ profitability. With that foundation, you can chart your course in aiming to increase your profitability. More on that, in another day, you can actually increase your profits significantly.