Business owners often work hard to improve their profit performance. There are many possible ways to maximize profit with minimum effort. The secret lies in how a business owner understands which factors influence the profit. This is what we call a profit variable, defined as factors influencing profit margins.
Focusing on the quantitative variables influencing high net profit margins will lead a business owner to reach maximum profit more effectively. Usually, profit variables consist of sales, expenses, and profits. However, the three variables could be expanded into five key profit variables. Understanding the five key variables and knowing how to measure each will efficiently gain your profits, revenues, and customers as the outputs.
Variable 1: Leads
Leads are generated when you have an effective sales and marketing system. Leads create potential buyers, which may later become loyal customers. The question is: which marketing strategies are working for your particular business? A trial and error test is essential to measure which marketing strategies are the best. While testing, you will also need to measure the result to evaluate whether your resources are well deployed.
Variable 2: Conversion Rate
Market response or the potential buyer is different from the result. You may receive a lot of potential customers asking about your product and service, but not many of them make purchases. You can see the conversion rate as the ratio between the number of people that bought versus the number of people who could have made a purchase. Let’s say ten people walk into your store, and 7 of them are buying something, then the conversion rate is 7 out of 10 or 70%. 6
Variable 3: Average Ringgit Purchase
In one time purchase, how much do the customers spend? Average Ringgit purchase is an average amount spent by the customers with each purchase in Ringgit. The average Ringgit purchase will help you identify the best promotion for your product and services. Some business owners use up-selling or cross-selling tactics to increase the average purchase. The simplest way is by offering a special price for a product with some minimal amount in a purchase. This cross-selling tactic will make your customer spend a little more than they initially intended.
Variable 4: Number of Repeat Purchases
A customer may have bought your products or services more than once over a year. Maintaining repeat purchases from loyal customers is a cost-effective way to increase your profits. There is no saying that a customer will always be a customer. Great business owners will have their way of keeping the customers returning and repeating their purchases.
Variable 5: Net Profit Margins
Net profit margins are the ratio of net income to revenue. The value is calculated by dividing the net profit or income by sales or revenue. It is a quick way to see the percentage of your sale revenue that your business has after accounting for the cost deployed into the sale. Net profit margin better represents your business’s financial health instead of the revenue alone. The net profit margin does not exist when your business is losing money. This condition is what we can call a net loss.
Why do business owners need to keep these variables in mind? Hitting new business goals is always possible with pre-planning and some strategic thinking. By understanding the profit variables, business owners can create a better plan with calculated decisions to ensure the resources are spent efficiently.