At a recent B2B expo, I caught up with a few clients as we were planning some upcoming Team days and they saw I had been showing The 5 Ways to a number of expo attendees. For those of you haven’t heard of The 5 Ways before, it is pretty much the most simple growth and profit-focused formula that can help ANY business, in ANY part of the world.
While most people see profits based only on two factors (revenues and costs), The 5 Ways sees profit based on 5 separate profit drivers.
Just with a few simple distinctions, The 5 Ways gives you 2.5 times more options to work on your profit – giving you 2.5 times more opportunity boost your profits – versus other “expert” owners who love to “cut their way” on the expense side to boost their profits.
What are those factors?
- Leads. This is the total number of leads – those people who have contacted or who have been contacted by the business – over the course of a year.
- Conversion rate. This is the percentage of people who actually bought. For example, if you quote 10 jobs and 3 go ahead, the conversion rate of 3 out of 10, or 30%, for that period of time.
- Average dollar sale. This is the average dollar amount per sale – estimated over the course of a year. It’s just an average, and can range from an hours Plant Hire, up to tens or hundreds of thousands of dollars.
- Number of transactions. This is the number of purchases the average customer will make over the course of a year. Again, this can be an estimate to start with but hopefully your CRM will tell you. Yes, some customers are only once a year customers, but we’re only looking for the company average of time.
- Profit margin. This is the profit percentage of each and every sale. Simply put, if a business sells something for $100, and profit was $25, the profit margin is 25%.
So how does this all relate to top line revenue and bottom-line profit?
Here’s HOW you can apply the 5 ways to your business.
Remember, this formula multiplies factors, not just adds them.
That means the cumulative impact on the bottom-line is massive.
The 5 Ways formula looks like this:
Leads x Conversion Rate = Customers
Customers x Avg. Value/Dollar Sale x Number of Transactions = Revenue
Revenue x Profit Margins = Profit
In your company, let’s say you have either estimated or fully determined the following numbers:
4,000 x 25% = 1000 Customers
1000 x $100 x 2 = $200,000 Revenue
$200,000 x 25% = $50,000 Profit
What does all of this mean?
Simply put, you are running a business that converts 1 in 4 prospects into paying customers, and those customers average two purchases at $100 per purchase each year – and your company enjoys a 25% profit margin on revenues of $200,000.
It also means your total profit for the year is $50,000.
So what would happen if, over the course of the next year, you could increase results by just 10% in each of the 5 areas?
Let’s do it, and then let’s take a look at what happens to your bottom line:
4,400 x 27.5% = 1210 Customers
1210 x $110 x 2.2 = $292,820 Revenue
$292,820 x 27.5% = $80,525.50 Profit
Examine the numbers closely and you’ll see the 10% increase is incremental – which means you could easily nudge numbers up by that amount over a period of months – and I’ve seen improvements over a number of weeks!
The bottom-line is that the new bottom-line looks very interesting, doesn’t it?
Even though we’ve increased each factor by just 10% (including top line revenue), we were able to boost bottom-line profit by 61% – or a total of $30,525.50.
What could you do with an extra $30,000 in your business this year?
Think 10% is impressive?
Test out some figures on your own and see what the numbers look like if you increase 30%, 50% or even 100% down the line.
The key is that we are multiplying factors – not adding – which has a massive impact on profit.
Contrary to those “mature” and “expert” business owners, the “5 Ways” isn’t a complicated numbers game.
It’s simply looking at your business in a different way and working a set of numbers that exist in every company.
While your competitors will be in an endless cycle of trying to grow top line revenue and cutting expenses to generate more profit, you’ll have at least 5 other factors with which to work.
And there are literally hundreds of strategies you can use to boost those numbers immediately and over time.
But today I’m going to give you 4 Immediate Strategies to focus on.
Set Up a Referral Program for your clients.
Send out newsletters with past customers (it is 10X more expensive to generate a new client than maintain an existing one)
Have your online presence looking professional and fully working! Yes that means Website and Social Media.
Train another salesperson in your team – they’ll probably end up doing it better than you!
If you want to do some extra homework around this, you can work your own numbers and brainstorm ways you could increase leads, get more customers coming back, increase what and the amount they buy and raise your profit margins.
Unlike some of your old homework from your school days, however, there can be a literal and immediate payoff to your efforts – in the form of actual dollars in your pocket.
Better yet, you’ll be pleasantly surprised how “mastering the numbers” is easy to do – and you’ll be more than happy with your ultimate results.
If you want to talk more about mastering your business, please feel free to give me a call on 0421 063 900.