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WHY PROFITABILITY SHOULD BE YOUR REAL FOCUS IN BUSINESS GROWTH
The Common Misconceptions About Growth and Profitability
Myth #1: If I make more sales, I’ll automatically make more profit
Given that the equation for calculating profit is total revenue – total expenses = profit It is easy to see how many business owners think if I make more sales, I’ll make more revenue and therefore more profit. And whilst this may be the case it isn’t always. That’s because you have to monitor your expenses and ensure that in an effort to make more sales you haven’t increased your expenses to the point where that additional revenue is essentially eaten up by extra expenses. For example, an easy way to make more sales in a business is to run advertising. This can bring in more sales, and therefore more revenue. But close attention needs to be paid to ensure the advertising isn’t eating too much into a profit margin of a service so whilst total sales might be going up total profit isn’t
Myth #2: Higher prices means higher profit
Another common myth is that if you charge higher prices you’ll make more profit, but that isn’t always the case for businesses that are providing services. In the product-based world if you raise the price of a specific product and don’t make any other changes in your business then yes you’ll make more profit. But many businesses in the service space in an effort to charge higher prices will actually make new ‘premium’ offers. These premium offers if not carefully created can easily come with needing more resources that essentially will eat into the profit margin.
Myth #3: Scaling is the fastest way to increase income
As a one-to-one service provider, it is easy to feel as if the fastest way to increase your income is by scaling your business. There are so many experts online telling service providers to scale and how it will mean they are able to make a lot more money.
Now I am a bit advocate for scaling your business, but that is more due to having sustainable growth and a business owner having the ability to make great money and also have a decent work/life balance. I would never be telling someone it is the fastest way to increase income. And depending on how you scale whilst your income will increase overtime it’s easy for your profit not to due to the additional expenses required with scaling.
Why Profit is so Important?
At this point you should understand the difference between increasing revenue and increasing profit, but what is profit so important for a business, and business owner.
1. Profit can enable a business to build up retained profits
A business can decide what to do with profit and one of the options is to keep the profits as retained profits. Having retained profits is good for the financial stability of a business and great for peace of mind as a business owner. When you know you have a chunk of money should there be an emergency that can be a big reassurance.
2. Profit can allow a business to reinvest for future growth
It’s very common in business to need to invest in order to support future growth. When you have been focusing on profitability and building a healthy profit margin for all of your offers you’ll have the profit to be able to invest (whether that be in tech, equipment, mentors, training, advertising) to support future growth.
3. Profit can mean a business owner makes more personally
Depending on your business structure it might be that the level of profit you make has a direct impact on the amount of money you make personally. By increasing profit it will mean you are also better off financially.
| WANT TO INCREASE YOUR BUSINESS’ PROFIT ?
A Strategy Day will help you to do just that! I have a tried-and-tested planning process that I’ve used for years that ensures that in just one day I can help business owners to create a plan to increase income and profit over the year ahead. All you have to do is fill in a questionnaire beforehand and then turn up on the day. I’ll then lead you through the whole process and write everything down – making it super easy for you! |
So What Really Increases Profitability in an Online Service-Based Business?
As shown increasing revenue and increasing profit are two different things. If you want to increase profitability in your business there are three areas to focus on.
1. Business Model and Offer Delivery
To increase profitability you’ll want to have a very close look at your business model and everything your business has available to sell. For each offer you’ll want to have a clear understanding of what it costs your business so you can sure when you move onto pricing that you are able to price for profit. Sometimes a small tweak in an offer delivery can make a considerable difference to profitability
2. Pricing Strategy
One of the biggest reasons why service-based businesses struggle with properly calculating profitability compared to product-based businesses is because usually a key component for the service is them and their time. Your minimum price should be calculated based on what it would cost to deliver a service if you had to pay someone else (with your level of expertise, skill etc). Then you’ll need to consider your pricing strategy in relation to your business’ positioning and overall aims. Are you a premium business with premium pricing? Where does this particular offer sit within your offer suite?
3. Marketing and Sales
What is it costing you to acquire a new client or customer? Very often this isn’t properly considered and so whilst the delivery of an offer is profitable it isn’t profitable in reality due to the costs of getting the original sale.
| WHEN YOU BOOK A STRATEGY DAY YOU’LL HAVE COMPLETE CONFIDENCE IN YOUR OFFER SUITE, PRICING AND MARKETING STRATEGY TO ENSURE YOU HIT YOUR SALES TARGETS.
Refining your offer suite and setting your prices so you can achieve your lifestyle and financial goals is all part of the Strategy Day planning process. But on top of that you’ll then have the marketing and sales strategy so you can sell everything in your revised offer suite so those profit goals become a reality. |
How to Improve Your Business’ Profitability
Review and Refine Your Offer Suite
Having the optimal offer suite is key for profitability for a number of reasons. With an offer suite, it is easy to have too many offers or two few others, and both can be bad for business. An optimal offer suite will make repeat purchases happen more often, which reduces the acquisition costs and improves profitability.
Price with Profit in Mind
Review your pricing and get to understand the true profit margin for each of your offers. If a key part of the offer delivery is your time make sure you are properly charging for that time.
Review Expenses
Go through your bank statements and look at all your expenses. Are you using everything you are paying for and do you have the best solution? An area to especially look at is technology and software. Things change quickly and what you needed in the past might not be necessary any more. And sometimes what was the best solution a few years ago isn’t any more.
That’s it. You now know why profitability should be your real focus in business growth.
Hopefully by now you understand why why growing your business focusing on revenue is not enough and instead you need to be focusing on profitability. As shown there are a number of areas where changes will improve your profitability, but it all starts with making that shift to focus on profit instead of revenue.
Let me know in the comments what your biggest takeaway has been.
If you are serious about increasing your business’ profitability then I’ll love to help you.
Strategy Day is perfect if you are looking for a fast-track review of your business and new strategy.
Or if you’d prefer the strategy and then ongoing support check out my 1:1 Business and Marketing Mentoring.
