Is Your Business Model Profitable?
Having a profitable business is something that we all desire and strive for daily. And as a business has many moving parts, it isn’t a matter of just tweaking one that will create profitability. It requires an understanding of what makes a business profitable and focusing on improving each area over time.
Here are a few critical areas of your business that you should review on a regular basis. Improving each of these areas or focusing on one and improving that, will go a long way to making your business a profitable one.
You have done your research and know what is an acceptable level of fees/charges for your products or services. Your services are viewed as representing good value for money by your target market. Having a range of prices and levels of services to suit a segment or market segments, allows for choice and can appeal to a wider range of prospects (depending on your strategy).
Your might price low and concentrate on a high volume of transactions or price high and have a lower volume of sales. At times your pricing may need to be flexible, based on competition. You may promote a new product, at a very competitive price, to gain a large slice of the market quickly and put your competitors on the back foot.
Whatever your pricing, it must be analyzed to ensure it’s acceptable to your prospects, covers your costs and makes you a profit.
Knowing What Is Profitable
To know what is a profitable product/service offering I am afraid you will have to crunch the numbers. What do you need to pull in revenue wise to break even? If you have to buy in materials (Goods) then know what the cost of those goods are. Next, work out what it costs you to pay for rent, utilities, employees, your accountant, automobile running costs, subscriptions etc.
So, what you end up with is a budget of what your expenses are on a weekly/monthly basis and what you believe you are bringing in sales wise. In a service based business you would work out how many hours of billable time at a defined rate are required to meet your overheads weekly – this is your break even. For a one person business It may be that you need 20 hours of billable time to cover costs on a weekly basis.
After the 20 hours you start to make money. If you had to bill 35 hours to cover costs, you need to revisit your profit model to review pricing, delivery mode and overheads.
Focus On Promoting High Profit Products
Having multiple products and not keeping track of each individual products gross profit contribution can lead to poor profit results. Some products may have over time become more expensive to produce and deliver, thereby lowering their net profitability.
If you have a cost and profit spreadsheet for each product/service you can promote those offerings that have the best profitability. This approach has many benefits. You work less hours for better profits as well as reducing your marketing activity costs.
Choice – Having Multiple Offerings
Have more than one offering to cater for choice and up sell possibilities. Only having one offering leaves you at the mercy of competitors who advertise a comprehensive range of offerings to cater for target market tastes. Think of going to your local restaurant and they only offer steak on the menu….
Bundling To Improve Average Customer Value
To really maximise your sales and revenue potential you should consider bundling products and services together. By doing this you allow for many products to be created from multiple components, at varying price levels.
Having the capacity to achieve this means that you can increase the average customer value of each transaction. Even a 10% increase in the overall transaction value can have a significant effect on your bottom line. As an example you would have a base service or product and then have available associated products or services that enhance the base product.
Fulfillment – Delivering On The Promise
A critical component of your business model is, of course, how you deliver your product or service. The delivery method can sometimes make or break a business. Take for instance mobile dog wash business. The business owner charges $45 to wash a dog and takes 25 minutes. That doesn’t sound too bad on the surface.
However, sometimes the customer lives 30 to 50 km away, so taking into account the round-trip and time, the owner is not making much money at all. In my local area I’ve seen many veterinarian practices installing DIY dog washes at a flat rate of $10 per dog. That is an example of a different delivery method for the same service.
You know it takes quite a bit of time, effort and money to bring a new customer on board. Your business model includes loyalty and retention strategies that ensure you keep your attrition rate low. Not only does this retain your customers, it allows targeted marketing to be delivered to an audience that has already done business with you. This audience is much more likely to take up your offers.
Your focus should not be just on getting new customers, but on looking after and maximising the potential of your existing customers. In some industries such as the hospitality industry, attrition rates can be 20 to 30% per year.
With a good customer retention policy and system in place this may be reduced to just 10%! In most cases this means that your revenue remains fairly consistent rather than declining 20 to 30% every year. Of course it costs a lot more to bring on board a new client as opposed to making an offer to an existing client who knows, likes and trusts you already.