Profit Matters
Last week, we talked about a more simple formula to reliably grow profit. This week, my temptation was to focus in on how to attract and sign new business. I bet it was what you would like to focus on too. Not yet.
Once you get a reliable attract and sign system in place, nothing will do more harm than adding new clients to a business that is not structured to retain and delight them at the lowest possible cost.
But why be so focused on profit? Isn’t running my business just to get as much profit as possible greedy and doesn’t that profit steal from my ability to grow revenue? No and not if you structure your costs to allow you to run the business and invest in the future.
So let’s talk a bit about profit, why it matters so much and why it creates freedom for you and your business.
I cannot tell you how many businesses I have worked with that had profit margins (the amount that your total revenue exceeds your total costs) that were well below 10%. Many would tell me that low margin percentage was typical for the industry. No matter what, low margins put your company at significant risk and live with them at your peril.
I am 51. I have lived and worked through 2 “once in a lifetime” recessions in just the last 20 years. I likely will go through a few more, as will you. Recessions are not the only risk as a large client could leave or a new competitor impacts pricing and sales.
When your profit margin is low, any shock to the business will drop your business below “sea level” and into losses. Once there, you will be forced to be reactive, start shedding expenses and pushing too hard to get new business at any cost. It is a death spiral. Sometimes slow and sometimes fast. I have lived it myself and I have met clients enduring it. There is nothing fun about it and it can make you live under extreme stress for years. I hope to convince you to take bold steps to avoid it, NOW.
When a business operates at a 20–25% profit margin, sure, a shock to the system will hurt. Maybe it even drops margins down to 10%. But, at those levels, you are surviving while your competitors are below water. You have the money to be patient. You do not have to change your 36 month year(Remember that?) plan. Your business is not at risk. You are in position to go on offense during difficult times. If you felt like I did during past recessions, there is nothing you should want more than to be in this position.
So, regardless of your industry, you can get there. Here are just two tactics to try out:
1. Reset Your Budget: Take your current revenue and write down 75% of that number. How could you alter your expenses so that they are no more than this 75% number? If you are at 25% already then work against 65% of your revenue. You are not doing this to be greedy or harsh. This is about removing risk from your business.
Get real with yourself here. What expenses are not necessary to do what matters the most to your clients (What THEY care about, not what you think they care about)? Where are you spending money just because it was “in the budget” for this year? You know, the budget that was constructed to operate at a 8–10% margin. What would your budget look like if you decided you must operate at 2–3x that profit margin?
Once you set it, then this is the margin you have to be committed to maintaining. Explain to everyone in the business that you are doing it to protect the business and everyone who cares about it. I have a client that takes any profit higher than their 20% target and puts it into a bonus pool. Everyone understands why the budget was reset and that it was not about the owner just wanting to make more money for themselves. The personal income of everyone in the business has grown as a result.
2. Innovative Pricing/Fees: How do you charge for your product or service? If your industry operates at 8–10% margins, do you not think there is a way to change the game and operate at double that? Ask any industry that has been disrupted by online services if they wish they had done it first. Car services, hotels, print media and anyone in retail. You know the story and there isn’t an industry that cannot be disrupted in some way. So, I ask, why not you? Other than your fear, what is stopping you from changing the the norm?
This is a chance to create a self-serve offering that could be half the price of your competitors and cost you a fraction to retain and delight your customers/clients.
This is a chance to redesign the way you price to better match the way your clients business operates or to show them you are committed and confident in the results you will deliver.
If you set your pricing like all of your competitors then you have a chance to change the game. As a personal example, I put up to 50% of my fee against my clients reaching a profit growth metric we agree on at the start of any engagement. It changes the conversation and works for well for me and my clients.
“This is how it has always been done” is just an early draft of a business obituary.
If you are not sure how it could work in your industry, then drop me a note and let’s brainstorm it a bit. There is ALWAYS a way once you have decided that you are done running your business at a low margins and/or want the freedom and power that comes from generating ever higher levels of profit.
As I talked about last week, get your pricing and cost structures set right so your expenses focus only on what will retain and delight your clients/customers. Create a structure with the right margin that you can scale as you ramp up a system to bring in a reliable stream of new business.
Remember, profit equals freedom for you and your business. Growing it will create innovation, strength and opportunity for everyone that relies on it.
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The above was from my latest newsletter. You can get your name on the list (And get a free copy of my book) at www.businessbrickyard.com
