Growing Your Business: The Profit Curve
Growing your business can look like many things. It can be top line revenue and sales targets and numbers, or it can be bottom line profitability. Either way, it’s important to understand how targeting one impacts the other.
For example, take the business that has the goal of doubling revenue in a given year. This business makes some very targeted and strategic marketing efforts. The outcomes work – revenue doubles, but the cost to obtain the revenue makes the company less profitable. Is that a win? Only the owner can decide.
Understanding Profit
This example explains the profit curve. If you are going to market and sell, inclusive of time and money, how will those efforts impact the profitability of the company? In healthcare, consider that you might be your company’s biggest biller. So, every day that you are off to find new work will have an impact on the bottom line. You need to be okay with that. Now, if your efforts are intended to fill the caseload of another professional in your company, and having that person working more is the business objective, then the short term loss of time and income may be exactly what the company needs.
What’s important is that you understand the return on your marketing and sales efforts. But each product, service and line of business will have a different profit margin.
There is a formula I love for this. It’s called the Way to Wealth.
The Way to Wealth formula works through how customers are acquired, how revenue is obtained from those customers, and how that revenue turns into profits.
When talking about profit, we focus on both the Cost of Goods (in services this is the cost to deliver the service) and Operating Costs (this is the cost to run the business outside of the cost of goods). Looking at sales efforts in this way - per product or service offered - can be very telling. Where can the business gain more returns from less effort?
What people tend to miss in figuring out how much it costs them to market is their own time. When you calculate how much you make per hour as an owner, you can determine the costs of you marketing versus others in your business doing this for you. Break the costs down as specifically as you can to make sense of the costs to develop, create, design, and sell the services you offer.
Market Profitability
Once you know what your products and services cost to bring them to market or to your customers, examine that again for each market you operate in. For example, if you are a healthcare or services company and sell to people privately, and to insurers, and perhaps to other businesses, each of these markets require different marketing and sales efforts, with different outcomes. Examining your markets thoroughly will help understand the profitability of each.
Your Choices?
Given that you now know the profitability mix for your markets, products, or services, it’s time to make some decisions.
Are you ready to look at the customers that are not working for your business? If you can prune the lowest 10% of customers that are yielding your lowest profits, you have freed your business capacity for the customers who offer your business better returns.
Now, do the same with your lower profit products or services. Can you turn these around to benefit your business better? Or, do you need to reconsider offering them in the first place?
Lastly, look at your markets. What markets are returning on the efforts and intentions that you are pursuing? Can these be explored? Expanded? Maybe even removed? You may be able to adjust the profitability of your efforts in that sector once you process the information about how it is performing.
Summary
Drive sales all you want, but don’t ignore the overall impact of your efforts on the bottom line. Profits are derived from the money you spend to provide your product or service. Knowing how each line of business is performing, in each market, and the type of customer who purchase those items, is important for your decision-making around sales efforts. With some careful considerations, and by calculating your time and outputs to build revenue or to improve profits, you can make very helpful and impactful business decisions.
Adapted from “Growth 3.11 The Profit Curve” by FocalPoint Coaching and Training Excellence, Copyright 2018, by Brian Tracy and Campbell Fraser. Reprinted with permission.
