Identify The Profit Levers

The are no shortcuts to defining and establishing the profit levers in any business.

It is hard work and requires plenty of data analysis.

We might think that making a profit is as simple as selling a product at a higher price than we paid for it or selling our services at a price high enough to cover your costs. However, there are plenty of other facts and considerations.

Taking shortcuts will invariably lead to damage and losses because if you do not ensure that all angles have been covered and the entire road has been traversed.

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What are the profit drivers in my business?

Any business has both Quantitative & Qualitative profit levers.

Profit levers are?all the elements that add up to revenue or costs, that if manipulated, can impact profitability.

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Quantitative profit levers are factors such as product pricing, product cost and sales volumes. In other words, anything that can be measured and quantified.

Some of the quantitative levers to consider when determining and establishing these levers in your business are:

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Input Pricing

Input pricing is the cost that your market can support.

The importance of this value is, to know whether you can sell your product or service at a sale price that will earn you a profit and be affordable to your chosen and identified market.?

Input pricing capacity is the factor that differentiates the small, private practitioner or home office-based SME, from the mid-size and corporate business.

Smaller businesses have lower input pricing models due to their lower overhead structures.

This is a market pricing advantage that can be used very effectively to compete with larger businesses, which will assist growth in smaller businesses ?

Expensive is not necessarily an indicator of better product or service and small start-ups should recognize the competitive advantage they hold with input pricing and service.

This value differentiation is discussed below.

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Sales Price????????????????????????????????

Sales price is the price charged to the consumer, which is required to make profit.

The profit you make must be sufficient to provide your business with enough funding to reinvest in the future growth of the business as well as pay dividends and/or profit share to the shareholders and investors in your business, which is the ROI [return on the shareholders’ investments].?????

You are in business to make a profit. If you do not, then you are wasting time and money.

If you generate just enough revenue to cover the costs in the business and leave no positive returns for yourself, as the owner and risk taker, then you need to re-evaluate how you are running your business or practice.

It is possible that your markets are pushing you down to these levels. There are many such examples. Manufacturing industries shut down due to cheaper imports. Financial services businesses shut down due to Fintech. Labour market practices can create unfavorable conditions in a wide variety of businesses. All these factors, place downward pressure on sales pricing, which leads to a lack of profitability.

Adapting to this Sales Price Pressure is discussed in our articles on Cost Analysis and Business Intelligence.

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Cost of product or service?????????????????????

The cost price of your product or service is the cost of bringing the product or service, to the market.

Cost effective buying of stock and raw materials is required to match your input pricing cost to your desired selling price.

In all businesses, including service delivery businesses, the cost price includes fixed and variable overheads of your business.

In a retail or wholesale business, stock in trade normally represents the greatest variable cost.

In service delivery businesses, labour costs are normally the greatest variable cost element.

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Breakeven point

Breakeven sales volumes and value are required to cover the costs of bringing your product or service to market.

Costs change continuously and this becomes an ongoing, repetitive, and never-ending process.

The facts to determine are the quantity and value of sales to be achieved to cover the full cost of producing the cost or service.

It is not the intention of this article to enter int a full and detailed breakeven analysis, save to say however, that you need to cover both fixed and variable overheads.

Fixed overheads remain constant and will require a fixed volume and value of sales to cover but variable overheads fluctuate with volume changes and require special attention and consideration, when determining sales volumes and values required to breakeven and to make profit.

So, why do we bother with breakeven analysis, if all it ever does is tell us that we are not yet making a profit?

Well, it is the marker that we lay down, which tells us each and every day, that we shouldn’t get too excited by our sales, until we have passed this mark. It also tells us how and when we have covered our costs and may look forward to more exciting times.

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Target market LSM

You need to do market research to find the appropriate LSM [Living Standards Measure] sector for your product.

Better quality products are more expensive, and consumers are often prepared to pay more for better quality. However, can you continue to find customers that can afford your product so that your business remains sustainable and profitable?

Very expensive products require a small and very exclusive market. There are luxury goods suppliers such as Richemont, who are a world-wide brand and who sell very low volumes of products at incredibly high prices, to a very small and select customer base. Equally so, the are small and independent furriers, who manufacture bespoke fur coats for a very small and select customer base. These businesses are all highly successful and profitable.

Conversely, there is the cheap, mass produced and mass marketed approach that China took, to sell products that would appeal to the mass markets.

Whatever you choose to do, you must do with intent and not haphazardly or by accident.

If planned obsolescence is your strategy, as the cellular phone manufacturers appear to have done, stick to the strategy.

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Product and service options and variations.

Is it possible to create differently priced products for different LSM categories within one business?

Can you offer varying service levels to create different pricing options?

I have witnessed professional services firms create a differentiated service model where they reduced the services offered to clients who were only able to afford lower fee structures.

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Check out our other articles on how to identify and use all the existing and

potential quantifiable profit levers in your business?