Price, Sales Volume and Costs – Your Three Key Variables to Greater Profitability
There are three key variables in any business that directly impact on your profitability. They are cost, price and sales volume. A small change of just 1% in each of these variables can have a dramatic effect on your profitability. This article explains why.
If you have a business making a margin of 25% and you are able to increase your price by 1% (which is easy), increase your sales volume by 1% (even easier) and reduce costs by 1% (the easiest of all three), then your profitability will leak by at least 10%. Even if your margin is greater at 50% increasing these three variables by just 1% will have a significant effect on your profit.
How do you achieve these 1% improvements? By incremental actions, just do it in bite size chunks. Energise your whole work force to start working immediately on all these little improvements. They all know far more about the detail they deal with every day than you do.
Have a meeting with every department and brain storm how you will achieve these 1% improvements. Record all the ideas. Then insist that everyone at the meeting takes away one idea to work on. Make a note of who is doing what, and when they hope to achieve theirs 1% contribution. Issue a minute of the meeting and then monitor the progress. Even if only a few achieve their 1% you have greatly exceeded the initial target – and that was going to give you a 10% profit improvement!
Reward all the successes. make sure everyone knows when someone meets their agreed target. Visibly reward them financially or in some other high profile way that raises their esteem in the organization. A 1% contribution is a fantastic help to your profitability so send them and their partner off for a luxury weekend at a location of their choice. The good news will be very infectious and soon a lot more of your colleges will be claiming their reward for achieving their 1% target.
The secret is to set small 1`% targets. If you set big, unachievable targets then you have no chance of gaining comitment from your collections.
At the end of the year celebrate all the successes. Then start all over again as this is a never ending process. If you want to stay ahead of your competitiors this process is essential. No-one stands still, keep driving forward.