You finished the meeting with your accountant. He says that the business needs to change if you want to retire in 3-5 years. How can he say that! Where does he expect you to make the changes to the business? That’s it! You really need to sell this business, BUT you need to recover your “nest egg” for the future, first!
The above scenario is hypothetical. However, when faced with the need to transform, where can you begin? First, consider reviewing these six areas within your business:
- How many leads are you generating per day?
- What is your conversion rate for each lead?
- How can you increase your customer’s average spend rate per transaction?
- How do you increase loyalty and increase the frequency of each customer’s purchase?
- What specific actions can reduce your product and transaction costs?
- What strategies will reduce overhead without affecting performance and productivity?
These 6 areas touch every aspect of your business, today. Each question addresses specific areas of your profit & loss statement. Identifying strategies for each area can generate significant increases in revenue and profits.
Lead Generation and Conversion Rate
The first question asks about lead generation. Most businesses make this a function of the sales team. Lead generation, is really about segmenting and targeting your customer base to generate new leads for the sales team. Your marketing efforts have a direct correlation to the quality and type of leads you receive. In addition, each phone call to your customer service line can help generate “new” leads. These calls can create NEW referrals, in addition to the existing services discussed or provided.
The second question specifically asks about the conversion rate for each lead. Conversion rate can simply be defined as the sales process for overcoming objections. If you have a good understanding of your customer base, then you know their needs. As such, your product or service already provides a solution. However, you need to overcome specific objections from the customer. These objections come in many forms—and usually “price” is the least concerning objection from customers.
The best way to increase your sales team’s performance is to look within the team. Who is your best sales person (inside sales or external sales)? How do they overcome objections? What can your other team members learn from your top performer? How can you transfer this knowledge?
Customer Spend and Frequency
The next two questions focus on your existing customers. The spend per customer transaction is a function of the goods and services you sell. To increase the spend, start dissecting your customer’s needs. If you sell products, can you offer additional services? For instance, if you sell coffee, is the customer willing to buy a bagel? If you sell HVAC equipment, can you tie-in a maintenance contract? If you sell cleaning services, can you expand into light maintenance?
The fourth question focuses on customer loyalty. You want your customer to return to you more than once per year. Therefore, consider a customer loyalty program or card to get that additional sale. Can you offer an automatic reminder service? Is there an additional product that is complimentary to your current offering? What goods or services do your customers want in the future?
Control Your Costs
The fifth and sixth levers focus on cost containment. Seems relatively simple to control costs, but we know that you cannot cut your way to prosperity. Let’s focus on your cost-of-goods-sold. Each business has a different supply chain. Reducing costs can be complicated. If the business is big enough, re-negotiating supplier contracts can help reduce costs. Inbound freight can also be a cost saving opportunity. If you have an opportunity to join a “buying group” for your industry, then you can leverage the combined volume of the group for better pricing. Lowering your COGS, may even be as simple as examining your product mix and matching your offering to your customer’s needs.
Direct manufacturing labor and overtime usually falls into your COGS category. If overtime charges are becoming excessive, then it is time to re-examine your operations.
Remember that for most businesses, your COGS may be as high as 65% of your revenue stream. Therefore, spending the time to make even a small reduction in your COGS can have a significant impact on your bottom line.
Finally, let’s not forget administrative overhead. Usually, this is a fixed cost independent of volume. Yes, this is usually where higher priced sales and administrative salaries live. Making reductions here may need to involve a slight re-organization. OR it may just need to be a re-allocation of your marketing expenses. As the business landscape changes, high priced advertising dollars are needed less. Digital platforms and loyalty programs pay higher dividends for both customer retention and referral business.
In summary, if you need a starting point to improve your business, consider these six levers. Each lever is tied to a specific part of the P&L statement. Because of the leverage that each of these strategies has on the business, these changes are not just additive; they can be transformative. The financial impacts of just a 5% improvement in each of these 6 areas can actually DOUBLE your net profit for a typical business. [We will review the financial proof in a separate article]. So, even as you prepare your business for a sale or exit, you can protect your retirement “nest egg” by implementing these six strategies within your business.