The purpose of any business is to develop a profit. There are many factors that will affect your business’s ability to generate a profit.
Those include the costs of goods sold on your products, your price point on your product and services, your fixed and variable expenses.
In this economy where the sales funnel is typically wider for most businesses, meaning it will take more calls to make a sale, the knee-jerk reaction is to cut your prices to increases sales revenue to help generate overall more profits.
That strategy typically will backfire (unless your up-sell process is strong and you know your numbers like clockwork).
One of the biggest issues is knowing the ratio between cutting your prices a certain percentage (like 10%) and knowing your corresponding COGS (Cost of Goods Sold) percentage.
The key question becomes, how many additional sales will you have to do at full price to make up for the one sale you gave a 10% discount? My good friend, Spike Humer, has developed an excellent chart that tells you the answer based on the price discount and COGS. For example, if your product or service has a 40%COGS and you cut the price by 10%, the company would have to make an additional 15 sales to make up the profit lost on that one sale.
This brings in revenue, but unless a strong back end exists, this can lead to a fast track to being out of business.
There are a few fundamentals that we recommend you have in place before you start cutting expenses to make the best decisions.
First, you must know your numbers. There are important questions to ask yourself about your numbers. How many leads do you have each day? What is the cost per lead? What is your cost per appointment? Cost per new client? What is the lifetime value of each new client?
For example, if you have 10 leads per day and spend a total of $2,000 per month for marketing, that is divided by 30 sales days (counting weekends ) or 20 sales days if you do not. That comes out to 10 leads per day x 30 sales days= 300 leads. Now take $2,000/300 leads=$6.66 per lead.
If it takes 10 leads to develop 3 appointments, that is $22.00 per appointment. If those three appointments turn into 1 sale, it costs you $66.66 per client (which is a low number). For many of you, it may be costing you $25 per lead that you receive. That changes the numbers dramatically.
The key is to know your numbers so you can focus on improving actual ratios for success. In a past interview, Vince Zirpoli does a masterful job explaining the best approach to measure ratios for your business.
The next step many consider is reviewing all their expenses to cut overhead. Every company should review expenses, whether you are Apple® or a small business. Most will make the mistake of cutting expenses that will only perpetuate your business going under.
Below is a list of the most common expenses to cut and input on how to view each of these categories for your own business.
Expenses to cut:
Marketing Services: Assuming you know your marketing numbers, and the goal is to be in a position to outspend your competition in lead generation.
You can only do this when you know your numbers and know your back end; if you have to cut marketing services or support, the best way to decide first to measure each marketing source’s numbers to determine your return on investment.
Some of your marketing may help with your brand and may not directly bring in leads, which may be harder to measure.
When you understand the ratios in your sales process, you are more likely to focus on what part of the sales process is not working, and when you improve that section, your overall results will increase. You may be on several monthly programs that provide services and solutions to your business.
The first step is to determine; you are taking the time to take advantage of those services fully and implementing them in your business. You may not have the time. Then evaluate which ones will have the best ROI in your business as you implement the training. You may find some services are duplicates of others, and you do not need all of them. That may be a place to start cutting.
Payroll: This can be a tough decision. If you have 10 employees, do you cut everyone’s pay by 10% or cut 1 or 2 employees and ask them to do more work? If you cut pay across the board, that can create a very negative environment in your entire office. It may be better to lay off 1 or 2. Then let your staff know that you did not want to cut payroll, and you need their help for everyone to take on more responsibility to avoid any further cuts in the future.
The key is to develop systems for your staff, so if you let someone go, there are policies and procedures in place to make the transition smooth.
We use Camtasia video often to create what we call a Success Manual on all the NCP processes and procedures. If someone leaves, another employee can watch the video on how to do that procedure.
Here is a link to Camtasia that will record any process you do on your computer, including filling out forms, steps in your computer system…This is a great tool for both your clients and your staff. https:// www.techsmith.com/camtasia/
You may find that hiring a few part-time employees may pay off in the long run. In the last year, NCP has up to 4 part-time employees that really worked out well with the workflow and overall costs.
When you find someone who only wants to work 10-15 hours per week and that is all you need, that is ideal. Typically, when someone takes a part-time job, they really want a full-time job but will not tell you that their unemployment benefits have run out.
You must be clear on the part-time person’s goal to see if their story matches their working part-time goals. There is nothing wrong with the fact that both you and the employee are ok with starting part-time with the hope at some point in the future, it may go to full time. Just be prepared that your part-time person may leave when they find a full-time job at some point. That can be costly with training.
Office supplies: This assumes you track office supplies to track use and determine which ones disappear and the costs that ad up.
Outsourcing: You may be working with several independent contractors to provide support to your business. You may want to go back and ask those providers if there are other price options for their services. Perhaps there is a lower price point that does not offer everything.
You may determine if you can consolidate your independent contracts into several skills. You may find out that outsourcing to a virtual assistant may make more sense.
The key is to measure and hold them accountable for their work on a short-term basis (maybe daily the first couple of weeks, then weekly to measure the results you are getting is fair for what you are paying them.
Take on More Responsibilities: This may be the approach you have to take. You may already be wearing all the hats, and your goal is to become more productive with your time to create profits for your business. I would recommend that you circle everything on your to-do list daily in green that has to do with making money for your business. Some things may be to organize, compliance… and if you spend 70% of your time on items that will result in your business making money consistently, you should be in good shape over time.
Taking on more responsibilities means being more organized and disciplined with your time and AVOIDING INTERRUPTIONS!
Overall, cutting expenses is an important business strategy. The key is to be effective and avoid the emotional reaction to make sure you make the best decisions to grow your business. Measurement will be your friend when it comes to helping you make better decisions for success!Tags: business expenses, profitability, Vince Zirpoli