The Mathematics of Profit
For many people, math is hard, but I promise this post won’t be! (Perhaps I should have changed the title of this post?) Really the mathematics of profit are pretty simple. Where confusion occurs is treating turnover as a surrogate for profit.
Just focusing on Gross Profit, which includes ALL your variable Cost of Goods Sold, including labour, there is a pretty simple equation:
Gross Profit = No. Sales x ( Unit Price – Unit Cost )
Which means there are 4 ways to increase your profit:
1. Increase the number of Sales
2. Increase the Price
3. Reduce the Cost of Goods Sold
4. All of the above
Whatever the combination of strategies you choose, there is generally a primary focus, volume or margin (which usually means Price).
A volume strategy is commonly achieved through mass marketing, whilst margin will be achieved through a branded niche. Either strategy can maximise your profits which is where the math comes in.
A lot of businesses focus on volume: Just get them through the door. The more sales, the more profit. Whilst true, ultimately maximum volume is achieved with the lowest prices, and unless you have some cost advantage, economy of scale is one such advantage and a proprietary process may be another, this is not a realistic strategy for most small businesses.
The margin strategy, where your Points of Difference are focused on a smaller niche, on the other hand, is a viable strategy for small businesses. You sell less at higher margins, generating more profit.
Lets look at an example. A business sells 100 units of a product for $10, with a cost of $7 and it’s profit is $300. If it was able to increase its prices by 20% to $12 with superior marketing, a 67% increase in margin, unit sales of just 60 units will generate the same profit.
This is the strategy used by Apple. It has just 15% of the smart phone market, but has 80% of the profit!
Choosing the combination of profit strategies that is the right one for your business, fully integrated into your marketing, is your business plan.
I have developed a tool called the Profitability Analyser that does precisely this for members of the Small Business Success Club. You just enter your data, and you can see where the gold mines are in your business, and where are the black holes. This tool enables you to come up with the profit strategy that works best for your business.
What is your plan to maximise your profit?
May Your Business Be – As You Plan It.
Dr Greg Chapman – The Profit Whisperer
Learn more about how these marketing strategies would work in your business when you request a Free Preview copy of the best selling Small Business book; The Five Pillars of Guaranteed Business Success
Or find out how to directly apply and implement these strategies into your business and achieve your goals by requesting a Complimentary Business Evaluation now.