Aug 06, 2009

Concentrate on What's Profitable

Here's the fourth big-picture strategy from my save your business list:

4. Concentrate your sales efforts on what's profitable.

There are two ways to make sure your marketing dollars and sales efforts are put to the best use: focus on selling (1) more of your bestsellers and (2) products or services with the highest profit margin.
Too many business owners ignore their bestsellers because they're selling well, and instead pour energy into marketing products or services that don't sell well, hoping to raise sales on these items too. It makes much more sense to concentrate your efforts on what your customers and the market have already told you--they want your bestsellers.

ist1_9372306-measure-your-profit.jpgAs to margins, in case you're not familiar with the concept, profit margin measures the difference between the costs of producing a product or providing a service and what you're selling it for. In other words, it lets you know what your return is on the money you pay out to buy or produce goods or to provide services.
To determine your profit margin, you divide your profit on an item by its sale price. For example, say an extermination service costs the customer $100, but the exterminator spends only $45 to provide it. The exterminator's profit is $55, so the profit margin is 55% ($55 divided by $100). If you have a margin of 55%, you know you will get to keep 55 cents of every sales dollar you take in (before paying for overhead).
If you regularly calculate your profit margins, you can monitor the profitability of your products or services. A decrease in profit margin often means that your costs have gone up--costs for inventory, supplies, or labor. This should nudge you to look for new suppliers, lower your labor costs, or raise your prices. If you're discounting products and services, it's especially important to keep track of your margin. You need to make sure that your costs for inventory and supplies, or your time or labor costs, aren't eating up your profit margin or even putting you into the negative on a sale.
Another way to use profit margins is in screening new products and services to sell. For instance, if you run a retail gift shop, you might decide to sell products only that can be bought and sold at a price that yields a profit margin of 50%. This will prevent you from taking on inventory that you'll eventually lose money on.
Once you figure out your profit margin on each product or service you offer, you can concentrate your sales efforts on those with the highest margin, which will let you keep more money from each dollar of goods or services that you sell.
And if you haven't already, pump your revenue and expense numbers into a profit/loss forecast to help you see the big picture: how many products or services do you need to sell each month, and for how many dollars, to cover your expenses and earn some kind of profit as well?