Want to Make a Profit? Don’t Forget the Basics!
The Complete Report
Thai Silk Magic, like most business entities, wants to ensure we can maximise our profit potential so that we can achieve our key mission of improving our village lifestyles. The development of our business necessitated overcoming many challenges and we wanted to share some of our experiences with you in the hope they will be interesting and helpful.
As you think about how to improve your business profits, do not forget the basis of creating profit. As everyone knows profit is what is left over after we have paid all our expenses. The problem is how best to improve your sales revenue and how can you optimize your expenses?
Far too often business owners lose sight of the key issues in running their organization because they are inundated with data, consultancy advice and other factors than can complicate otherwise very simple facts and trends.
This report goes “back to basics” on purpose so that you can apply these well known principles and guidelines to your current business.
Four Basic Profit Factors
As an initial reminder, the four basic things that effect profits in any organization are:
- Quantity or volume of sales
- Variable Costs – costs that increase or decrease as sales volumes increase or decrease (e.g. acquisition costs)
- Fixed Costs – costs that normally do not change as sales volumes change (e.g. rent, salaries)
There is nothing magical about what needs to happen to improve profits. These 4 factors are critical to your business and constantly need your attention. The problem for many business owners is not their awareness of these key issues but rather doing something about them when things start to unravel. Often it is a matter of timing, commitment as well as strategy.
Key Conditions for Profits
It is important to note that profits can be increased by either increasing or decreasing any of the four factors, as long as some conditions are met.
· All four factors will affect each other· There is no standard formula to improve profits
· An increase in sales and/or a reduction in variable costs will increase gross margin/sales
· An increase in sales and/or a reduction in fixed costs indicate greater productivity and lower overhead costs/sales
Any profit improvement strategy must focus on either or both of two things:
1. Achieving a higher gross margin in sales by increasing price and/or reducing variable costs AND/OR
2. Achieving greater sales per fixed cost by increasing productivity of those things that have a fixed cost
So What Happens to Your Profits If:
A. Prices Increase – sales volumes could stay stable or decline. If sales declines then this decline would have to be less than the offset created by the price increase and resulting gross revenue increases.
B. Prices Decrease – sales volumes would have to increase to compensate for decline in price. If sales volumes was to increase there is a possibility of a decrease in the per unit fixed and variable costs because of increased economies of scale
C. Variable Costs Increase – increased variable costs should lead to or be a result of improved product or service quality. The market would have to accept a higher price, or the improved product would have to attract enough new customers to offset the increase in variable costs.
D. Variable Costs Decrease – the sales volume would have to remain unchanged. The decrease in variable costs could not be allowed to affect product or service quality – which would have a negative effect on sales volumes. If sales did decline, the fall in gross revenues would have to be less than the decrease in variable costs
E. Sales Volume Increases – the price could either remain unchanged or decline. If the price was reduced, the reduction would have to be less than the offset created by the volume and resultant gross revenue increases. Another possibility is to achieve a reduction in per unit fixed and variable costs due to an increase in economies of scale.
F. Sales Volume Decreases – a savings in fixed costs would have to be achieved by reducing the size of the business or production levels would have to be evaluated to find variable costs economies of scale. This savings would have to be greater than the reduction in gross revenues due to decreased sales volumes
G. Fixed Costs Increase– the increase in fixed costs should lead to or be a result of improved products or services. The market would have to accept a higher price, or the improved product would have to attract enough new customers to offset the increase in fixed costs.
H. Fixed Costs Decrease – sales volumes would have to remain unchanged. The decrease in fixed costs could not be allowed to affect product or service quality – which would have a negative effect on sales. If sales did decline, the fall in gross revenues would have to be less than the decrease in fixed costs
Distribution and Marketing Strategies
Improving your profit potential requires you to clearly differentiate your business, improve productivity, have correct pricing strategies and establish effective customer retention programs.
Your marketing program must try to differentiate your offer. Your Unique Selling Proposition (USP) can easily be “unique” by ensuring you place “you” and “your particular offer” into your marketing TOGETHER. There is only one “you” so make sure you use it.
Customer retention programs are included as part of distribution and marketing strategies as it’s important that your sales and marketing staff are fully committed to this vital issue as well as any specific customer service department you may have.
Getting bigger margins for each and every sale you make is the name of the game. This usually means that either you have to sell more at a higher price or make more at a lower cost whilst maintaining your existing price.
If you can manufacture your products and services more efficiently then you can improve your margins otherwise the key factor or variable is your selling price. However, many business owners are reticent to increase their prices for fear of losing market share to their competitors.
It is more common to see businesses lowering or discounting their prices in order to improve sales and market share but be aware that this has very short term viability. Competitors will match you sooner or later and then you will have no where to go!
If you really believe in the quality of your products and services then focus on your customers and not your competition – provide your customers with the very best service, advice, quality product and delivery systems in order to differentiate yourself and justify your pricing strategy.
Thai Silk Magic
Creative Distribution and Marketing Strategies from a Thai Village!
An good excellent example of differentiation and creative pricing strategies comes from our newly established Thai Silk Magic group based in a small, rural village near the Cambodian border. The world market for Thai silk is dominated by some very large operations who have almost unlimited supplies of Thai silk available to sell at wholesale or highly discounted prices.
Our small team of weavers could never match the supply quantities of our competitors nor their very low prices. Instead Thai Silk Magic with our original high quality handmade silks using only 100% natural dyes, established our prices 10 -15% higher than our much larger and more established competitors.
We then focused our attention on promoting the fact that our supplies of high quality silk were not only unique but extremely limited because of the labor intensive processes of spinning, natural dyeing and weaving required to make our totally original handmade silk fabrics.
We also provide our customers with a wonderful story about the reasons for our business operation as well as creating an excellent personalized service via our customer focused website.
Thai Silk Magic’s distribution strategy for our high quality silk fabrics included world-wide free shipping. In order to further our market differentiation we provide services that our competitors do not offer. Thai Silk Magic recognized that our competitor websites only focused on Thai silk and this was another opportunity to achieve differentiation.
Create Value AND Perception of Value
Our website provides practical advice and guidance on a wide range of topics from leadership, work ethics, online shopping and work place recognition programs. These topics are all relevant to our website as we use real life examples related to our Thai Silk Magic group or our village as illustrations. These “extra customer care” articles are designed to provide our readers with interesting and helpful ideas.
All these strategies show the strong belief our Thai village has in the quality and value of our product offer. By developing a “real perception of value” that truly differentiated ourselves from our competitors, we hope to have initiated what will be a remarkable successful business model.
Get a Fresh Perspective on Your Business!
Irrespective of your industry one can always learn valuable lessons if you are prepared to look and listen, especially to business experiences far removed from your typical industry resource list. All your competitors will be fully aware of your usual industry resources and most likely will have the same information access.
So get completely away from your typical industry thinking and make the time to really look at your organization and your future planning. Successful businesses are all around you -so you can be one as well.
If you are not completely satisfied with your profit potential then be prepared to do something completely different. You will amaze yourself if you just give yourself the time to think creatively by learning from others outside your normal industry reference sources.
Of course, any major adjustment or change in your strategies should be carefully tested with market sampling before you implement a full blown change in strategy. But do not let this deter you from possibly creating an incredible break-through business decision.
So do you really believe in the quality of your products and services?
Can you think of simple ways to differentiate yourself from your competition?
What can you provide that your competitors are not offering?
Your distribution and all your other business systems should implement strategies to differentiate your business where ever possible. Apply your own creative distribution strategies to increase productivity and sales whilst at the same time assessing the potential impacts of these strategies on both your fixed and variable costs.
Quite often it’s a case of trial and error so always use market sampling before establishing any full blown distribution strategy.
Your Customers – Do You Really Care?
As part of your fresh perspectives ask yourself how much you really known about your existing customers.
How much contact do you have with them?
How important are they in your future planning?
What percentage of them are repeat customers? Do you know? Do you care?
Have you ever really asked them for products and/or services suggestions?
So many organizations spend a fortune looking for new customers rather than keeping close contact with their existing client base. Always remember that “people buy people” so show your customers “how much you care” rather than focusing on “caring how much you can show.”
Research shows that more than 65% of customers leave because of perceived indifference so constantly look for ways to delight and surprise your customers. It makes good economic sense to have this type of customer focus and it’s also a key factor in any profitability strategy.
Honesty Time – Some Key Questions
There are a series of questions you must consider with total honesty and then apply the findings to your business in order to optimize your profit improvement strategies. The answer to some of these questions may involve delicate negotiations between various parts of your organization and may also potentially conflict with the answers to some of the other critical questions.
However, the key is to get the BEST answer possible if you really want to clarify your organization’s strategic directions and improve your profits. It’s not rocket science but it will take courage, honesty and conviction.
In Reviewing Your Fixed Costs:
1. Are you doing everything you can to retain your customers?2. Are you satisfied with your staff turnover rates?
3. How can you improve your staff morale and enthusiasm for their roles?
4. Does your staff understand and support your key business strategies?
5. What service/support does each component of your organization provide to your business?
6. Can you eliminate this service/support?
7. Can you get the same service externally at lower cost?
8. Is it realistic to move to another supplier of that service?
9. If you moved to a new service supplier, would you get similar or better quality support?
10. Would this move affect your sales and services?
11. If you spent more on this service/support function, would it create more revenue than costs?
In Reviewing Your Variable Costs:
1. Is your advertising effective? If you don’t know then why continue with it?
2. Are you attracting the right potential customers?
3. Is your marketing strategy in line with your distribution strategy?
4. Are you paying too much commission and bonus for lower performing sales staff?
5. Are you paying too much for Joint Venture business?
6. Are your sales bonus payments linked to sales quality as well as quantity levels?
7. Are you maximizing your website conversion rates?
8. Are you optimizing your current market positioning?
So there you have it all in a nutshell. This article has been deliberately simplistic in its approach because so often business owners complicate the key basics of how to improve profits!
Keep it simple, be positive, always look for creative ideas away from your industry and apply the principles learnt with common sense.
Remember there is no magic when it comes to creating and maintaining a profitable business.
A Final Word from Microsoft’s Bill Gates re Common Laws of Business!
“It is not smart to pay too much, but it is worse to pay too little. When you pay too much you lose a little money. When you pay too little, you sometimes lose everything, because the things you bought were incapable of doing what it was supposed to do.
The common law of business prohibits paying a little and getting a lot – it cannot be done. If you pay low or deal with the lowest bidder, it is well to add something for the risk you run. And if you do that, you will have enough to pay for something better.”