In today's Looney Times it is imperative to step back and ask yourself these questions: Is your business giving you what you want out of life? Is your business growing, maximizing profits and creating free time for you to achieve your personal objectives?
If you have difficulty with your answers, you are not alone. Now is the time to ask yourself the ultimate question to help achieve a change in your business. What drives your economic engine with the greatest and most sustainable impact?
Let’s take a clue from author Jim Collins. He states a company can go from “Good to Great” if it determines and understands the intersection of three elements: 1) What it is deeply passionate about, 2) What it can be best at in the world, and 3) What drives its economic engine. Let’s focus on the understanding of what drives your economic engine by determining the best way for you to analyze profits in your business. We want to decide on what is your profit per "x".
Measuring Profit Margins
What key ratio do you use to measure your business’ success? Think about it in terms of the following question: If you could pick one, and only one ratio – profit per “x” – to systematically increase over time, what “x” factor would have the greatest and most sustainable impact on your economic engine?
Let’s assume that you conduct your business from one location, and that you measure your success by the amount of profit you make. The next question is, profit per what (“x”)? Is it profit per customer, per product or service, per employee? Which “x” factor, by focusing on it and improving the ratio over time, would provide the highest and most sustainable economic growth?
Let’s illustrate with a few examples:
1. Profit per customer
In this instance, you’re looking to increase the number of transactions by each customer. You develop strategies to you get your customers to come back repeatedly and buy higher-margin products. An example is Gillette. They moved from disposable razors to high-tech razors with disposable click-in razor blades. A subtle shift – but with higher technology products, their repeat transactions became far more profitable than the old disposables. How can you apply this concept to your business?
2. Profit per product/service
Now, let’s look at increasing profit margins in two additional areas. First, reduce the cost of providing your products/services by negotiating better agreements with suppliers, and reducing your production costs. You develop strategies to employ technology to reduce the cost of producing goods or services. If you’re outsourcing the technical part of the job – is the organization you’re using employing the most sophisticated and efficient methods available at a more effective price? Would you be better off doing it in-house?
Second, increase the efficiency of delivery and distribution of your products/services. Focus on creating a more productive team which will do the job better and more efficiently; and improving your business systems to eliminate unintentional slack.
3. Profit per employee
Here we focus on measuring profit per staff person. You develop strategies to run the most cost-effective team – not just in the sales department, but overall. You hire the right people, for the right positions, with the right level of self-motivation to drive the business. Take your time filling the higher positions with the right people, and then establish great systems to support them. Your high-caliber team will then take care of the rest of the business.
So, there are three examples of key profit ratios that you can use to drive your economic engine. Do you see how each “x” drives a different set of decisions? And there’s more. How about “profit per customer visit”? What if you have a multi-location business and you’re looking to expand? Do you measure “profit per outlet” or “profit per region”?
Southwest Airlines measures profit per plane since their brand promise includes lots of flights which focuses management on the number of planes in the air. What profit per “x” will you choose to drive your business decisions?
So, go ahead and pick one – just one! Then measure it and focus on ways you can increase it over the next six months. And if you’re not sure which measure to choose, or what its effect might be, call us today at (215) 732-2230.