Increasing Business Profits
Medium to larger companies often have metrics. Some call this your KPIs (Key Performance Indicators). It's excellent to have these, and every business (big or small) really should develop a list of the top 3-5 things that you want to track. However, I see many businesses leaving out 3 of the most important numbers they should know. Especially when it comes to increasing business profits.
The 3 Numbers Every Business Owner Needs to Know
Customer/Client Lifetime Value
If you're really looking to increase business profits you're going to want to know how much a customer is worth over the lifetime that they stay with you. This can be used to figure out what marketing and advertising budgets are correct for your business. It will also help you measure ROI (return on investment) of any of those activities.
Here's an example. Let's say that you own a carpet cleaning business, and on average your clients get their carpets cleaned 2 times a year. If an average cleaning is $400, then you know that this is $800 a year and you can look back and see the average time that a customer stays with you. Let's continue and say that it is an average of 2 cleanings they get with you over the year, then they fall off.
If you didn't consciously track these numbers you would miss a lot of opportunities. For instance, after seeing this information you may want to undertake an initiative to reactivate past clients. This would essentially be "found revenue", that would be considered "low hanging fruit".
The next thing you could do is try to get more transactions per customer. Essentially this would be more cleanings. This could be done with a "Gold Member Program" where you give a discount on cleanings. By understanding just this first number, you can now use two strategies that will dramatically increase your business profits without a lot of money being spent on marketing, advertising, or even it taking a whole lot of time.
If you didn't take the time to review this number it's likely that opportunities like this would slip by, and business profits would be lost. These numbers allow you to focus on the 3 ways to grow your business. You can increase the amount of clients, increase the amount of transactions/referrals from each client, or you can increase the transaction amount per client.
But, What If I'm Just Starting Out?
Excellent question, and the simple answer is that you have to guess. Be as conservative as possible. From today forward make sure you track this number aggressively. However, there is a very ninja way to get this number even if you're starting day one in your business. It's related to market research.
Basically, by looking at your current competition in the market you can figure out what these numbers are. You can even find ways of getting the information directly from your competitors.
One way to do this is to "survey" businesses in your space. This doesn't even have to be in the same location that you're planning on doing business. However, doing a survey and asking these companies about this can be a VERY effective way to understand your market.
Another way to do this is to find someone who is already doing well in your industry and just ask them for advice. Now, there's a chance that they will say "no" or not tell you the real numbers... but, many entrepreneurs care about other business owners success. They will also be honored by the fact that you asked them (strokes their ego a bit).
Increasing the profitability of your business can start simple. There are many tools out in the market that will help you track these numbers more effectively. For example, Hubspot has a CRM that you can get started with for free.