7 Levers of Business (or How to Double Your Profits)

I’m going to say, right up front, that this article involves some maths.

If you’re numerically challenged, don’t panic.

It’s basic maths, and I’m even going to give you a free tool that does all the number-crunching for you.

The reason I’m telling you this now is because I don’t want you to skim down the article, see a bunch of numbers, and immediately hit the “back” button. Despite initial appearances, this isn’t going to be a complicated article to understand.

But it is one of the most important articles you’ll ever read.

And I really, really want you to read, apply and benefit from this.

Simply put, what I’m about to reveal can almost double the profitability of your business.

And who’s going to say “no” to that?

But I’m getting ahead of myself. Let’s start from the beginning.

The 7 Levers of Business are specific aspects of business that are each directly linked to your profitability. We refer to them as levers because, if you “pull” on any of these elements by improving them, even slightly, your profits will increase accordingly.

Watch the PreneurCast podcast on The 7 Levers of Business.

The 7 Levers of Business are…

1)      TRAFFIC: Every person that visits your website or walks into your store adds to your overall traffic. Basically, we’re talking about first-time visitors.

2)      OPT-INS: This refers to individuals within your traffic who take a step that goes beyond that of merely looking, but comes before the buying stage. On a website, this might refer to people who register their email address through a lead capture form; in a shop, this could be someone who tries on an item of clothing in a changing room.

3)      CONVERSIONS: This is the percentage of your “opt-ins” who take out their credit card and commit to spending money.

4)      ITEMS PER SALE: Nice simple one – this is the average number of items purchased by each customer.

5)      AVERAGE ITEM VALUE: To get this figure, divide the total value of all the items you’ve sold in a given period by the total number of items sold in that same period.

6)      TRANSACTIONS PER CUSTOMER: On average, how often do customers make repeat purchases?

7)      PROFIT MARGIN: After you’ve subtracted the cost of making sales, what’s the average profit margin of each sale as a percentage?

Before we go any further, the first question you should be asking yourself is, “am I able to calculate each of these elements?” If not, drop whatever you’re doing because your business is in trouble.

Unless you have a way of calculating this information, then you have no way of knowing if your business is even profitable. You could, without being aware of it, be making a loss on each sale and every customer purchase is driving you closer to bankruptcy!

To be clear, I’m not saying you should be able to quote, at a moment’s notice, the latest precise numbers for each of these seven levers. But you should at least have the resources in place to be able to sit down, and in a reasonable amount of time, work out your current metrics.

If you don’t have the necessary resources, you should install Google Analytics, talk to your accountant, or do whatever you have to do to get the numbers for each of the seven levers.

Next comes the fun part.

I’m sure it won’t come as any shock to you if I said that increasing one of these levers by 10% will increase your profitability by 10%.

Obvious, right?

So, if we increase all seven levers by 10% each, by how much will our profitability increase?

Most people would answer “70%”.

But they’d be wrong.

Increasing all seven levers by 10%, actually increases overall profitability by…

94.8%

Yep, profitability almost doubles!

If you’re mathematically-inclined, you probably already understand why this is the case.

Otherwise, let’s work through an example to prove that this is the case.

CLOTHES STORE EXAMPLE

Imagine that you own a clothing store and you’re going to work out your metrics for the last 12 months.

1)      TRAFFIC: 100,000 customers walked through your door during the last year.

2)      OPT-INS: 20% of your customers try on a garment in the changing room. That’s 20,000 opt-ins altogether.

3)      CONVERSION: 20% of people who try on a garment go on to make a purchase. 20% of 20,000 opt-ins, equals 4,000 customers.

4)      ITEMS PER SALE: Let’s keep it simple and say that each customer purchases one garment. So, 4,000 garments were sold to new customers.

5)      AVERAGE ITEM VALUE: Let’s say the average item value is $100. Total sales are $400,000 ($100 × 4000 garments).

6)      TRANSACTIONS PER CUSTOMER: Again, keeping it simple, let’s say that you don’t currently receive any repeat business, so the number of transactions per customer is 1. Total sales are still $400,000.

7)      PROFIT MARGIN: After wages, energy bills, and purchase of stock, your profit margin on each sale is 50%. Your net profit, then, is $200,000 (50% of $400,000).

Straightforward so far?

Good. Now let’s look at what happens if we increase each lever by a mere 10%.

1)      TRAFFIC: 100,000 customers increased by 10% comes to 110,000 customers.

2)      OPT-INS: You increase your opt-in rate of 20% by 10%, bringing it to 22%. That means that 24,200 people (22% of 110,000) try on a garment.

3)      CONVERSION: You increase your conversion rate of 20% by 10%, bringing it to 22%. So, your total number of sales is now 5,324 (22% of 24,200).

4)      ITEMS PER SALE: A 10% increase of 1 item per customer is 1.1 items per customer. This simply means that one in every ten customers purchases two garments. Total items sold are now 5,856 (1.1 x 5,324 – rounded down).

5)      AVERAGE ITEM VALUE: Average item value has increased from $100 to $110. Revenue is now $644,160 ($110 x 5856).

6)      TRANSACTIONS PER CUSTOMER: As with items per sale, this increases to 1.1 which means one in every 10 customers now comes back another day to make a second purchase. Revenue is now $708,576 (1.1 x $644,160).

7)      PROFIT MARGIN: Margins have increased from 50% to 55%, which makes your net profit $389,716.80 (55% of $708,576).

And there’s your proof.

In the first example, your net profit was $200,000. But in the second example, by increasing each lever by just 10%, your net profit increased to $389,716.80, almost doubling your bottom line.

Aside from being a rather cool mathematical trick, the significance is that this strategy allows you to double your profits, simply by slightly improving your existing numbers.

This is far easier than the alternative.

If you’re receiving 100,000 visitors a month to your website, setting out to double that to 200,000 is difficult.

Really difficult.

But increasing your traffic to 110,000, a relatively small 10% increase, is much more achievable, perhaps by spending a little more on PPC or a little more time improving your SEO.

The same is true of your sales conversion percentage.

Doubling your conversion rate is also difficult to do, but improving it by 10% can be achieved by testing some different headlines, or by adding a trust seal.

You could aim to focus on just one lever per month, for seven months.

And at the end of that time, you’ll have almost doubled your profits.

This strategy is so much easier than trying to fix everything at once. Spend a whole month on just one lever and you’ll be amazed at what you can achieve.

We could spend a whole article on each lever, considering how it can be improved. However, what you often find is that, when you focus on just one aspect of your business, you quickly notice leakages, namely areas where you’re underperforming due to something that can quickly be fixed or improved.

Before you know it, you’ve made a 10% increase and you’re ready to move on to the next lever.

Oh, and by the way, although increasing each lever by 10% almost doubles your profits, increasing each lever by 20% increases your profits by…

Wait for it…

258.3%

If you want to run some numbers of your own, there’s a free calculator that you can use at http://www.7leverscalculator.com/.

Give it a try and then tell me about your experience using the comment box below.
  • http://twitter.com/preneur/status/231209848027611136/ Pete Williams (@preneur)

    New Article: 7 Levers of Business (or How to Double Your Profits) http://t.co/MmnDV2gY

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    7 Levers of Business (or How to Double Your Profits) | Preneur Marketing Blog – Pete Williams http://t.co/XZSkJz6r

about-pete
Pete Williams is an entrepreneur, author, and marketer from Melbourne, Australia.

Before being honored “Australia’s Richard Branson” in media publications all over the continent, Pete was just 21 years old when he sold Australia’s version of Yankee Stadium, The Melbourne Cricket Ground For Under $500! Don’t believe it? You will! Check out the story in the FAQ section (it really is our most asked question).

Since then, he’s done some cool stuff like write the international smash hit ‘How to Turn Your Million-Dollar Idea Into a Reality’ (+ the upcoming ‘It’s Not About the Product‘) and he’s created a bunch of companies including Infiniti Telecommunications, On Hold Advertising, Simply Headsets and Preneur Group.

Lots of other people think he’s pretty good too! He’s been announced as the Global Runner-Up in the JCI Creative Young Entrepreneur Awards for 2009, the Southern Region Finalist in the Ernst & Young 2010 Entrepreneur of the Year, and a member of SmartCompany’s Top 30 Under 30.

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