Every entrepreneur starts a business for the most important purpose to make a profit and to improve personal life. Profitability is something that is the most wanted thing in the life of every entrepreneur. If you have $5,000.00 this year you will want $7,000.00 next year. If you have $10,000.00 profit this year you will want $15,000.00 for next year. If you have $150,000.00 profit this year you will want $200,000.00 for the next year. Always you will want more profit.
You must permanently to do two things about your profitability:
- Analyze from time to time the profitability and
- Improve the profitability.
How you can do these two things?
First, answer on these questions:
- How much leads you generate annually?
- What is the conversion rate from leads into the customers?
- What is your average sale per customer annually?
- How much is your average profit margin?
Put into the table answers as in the example below:
| Number of Leads | 50,000.00 |
| Conversion Rate (%) | 5% |
| Annual Average Sale per Customer ($) | $200.00 |
| Average Profit Margin (%) | 10% |
| Profit (50,000.00 x 0.05 x $200.00 x 0.1) | $50,000.00 |
As you can see these are 4 most important elements that have direct impact on profitability of your business.
You can make improvements if you increase one or all of this:
- Number of Leads and/or
- Conversion Rate and/or
- Annual Average Sale per Customer and/or
- Average Profit Margin.
Let’s say that you want to improve all the 4 elements for 10% then your profitability will be:
| Number of Leads | 55,000.00 |
| Conversion Rate (%) | 5.5% |
| Annual Average Sale per Customer ($) | $220.00 |
| Average Profit Margin (%) | 11% |
| Profit (55,000.00 x 0.055 x $220.00 x 0.11) | $73,205.00 |
As you can see that 10% improvements of all 4 elements that impact on the profitability can bring you profit of $73,205.00 that is 46% improvement in profitability. This can be called butterfly effect.
Also, if you improve anyone single element you will improve profitability. For example, if you increase prices and profit margin your profit will be larger.
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