The 4 Simple Profit Levers That Grow Your Business.
an airplane cockpit
Back in 1992, Stephen Hindman and John Sviokla from the Harvard Business School looked into sales effectiveness and found that: "A company that can increase its sales-revenue-per-person productivity by just 5%, can increase its profit results by 20%.“
"A company that can increase its sales-revenue-per-person productivity by just 5%, can increase its profit results by 20%.“
That is a phenomenal statement, isn't it? When I present on this subject at conferences or in my workshops I usually get two reactions:
People who are good with numbers are likely to say something like: "Duh, everybody knows this."
Whereas, most other people will say: "Wow, I had no idea!"
A sample revenue & profit calculation. Check your sales potential next.
Let's see which of these will apply to you.
Plus, it will give you valuable insight into the relationship between sales productivity, revenue and profit.
What effect would it have on your business?
You can calculate the financial impact on your own business
just by using this handy calculator.
Let's now get into it and take a look at some specific examples.
In each of the following samples, we only change one parameter at a time, and we only change it by a mere 5%, in order to illustrate the difference it makes to your bottom line.
1. Your Base Case
This first image below illustrates our base case in this scenario. I have kept the numbers simple to keep it simple and to make it easy to illustrate the point.
The revenue vs profitability base case scenario
Here we assume that we sell a product or service for $100, that it costs us $60 to produce, and that our gross profit is therefore: $100-$60=$40.
Then we subtract our fixed costs, admin and direct selling expenses, and we end up with a profit before tax (PBT) of $10.
So, in our base case on sales revenue of $100 we make $10 profit before tax, our bottom line in this scenario.
So far so good for our base case.
Below, I will now make a small number of adjustments to our base case scenario to illustrate how a change of just 5% can have a dramatic effect on the resulting profit.
2. Reducing Direct Selling Expenses ("Spend Less On Prospecting")
The effect of reducing direct selling expenses on the bottom line
The first adjustment is that we reduce our direct selling expenses by 5%.
This is when your finance director tells you to reduce client-related travel and entertainment, for example.
As promised, the chart here shows the impact on the bottom line if this business reduces its direct selling expenses by 5%.
As you can see, the improvement to our bottom line is only marginal, compared to our base case scenario. In fact, reducing direct selling expenses by 5% improves profitability by only 3%. To me, this does not seem a hugely effective way to drive bottom line performance.
3. Increasing Sales Volume ("Winning More Sales")
The effect of increased sales volume on profitability
In this next scenario we will make a different adjustment, also by just 5%.
Here we will illustrate what happens when this business increases its sales productivity by just 5%.
In other words, what happens to our bottom line when we sell just 5% more?
In this scenario the business is now selling $105, i.e. $5 more than in our base case.
Leaving all other expenses the same as in our base case and just increasing our sales revenue by 5% results in an improvement to the bottom line by 20%.
That's a four-times profit multiplier !
That's a four-times profit multiplier !
I have one more adjustment scenario for you.
This one is spectacular.
4. Lifting Prices ("Charging More")
The impact on profitability of raising price
In this next illustration I will only change the price that our business charges. We'll lift our prices by just 5%.
So, instead of earning $100 on our top line revenue, we will now earn $105.
All other parameters remain the same as in our base case.
The result is even more dramatic than in our previous scenario: Lifting our prices by just 5% results in a lift to our bottom line by 50% !
That's a ten-times profit multiplier !
But, there is a but.
In the current hyper-competitive economic environment how likely is it that you can increase your prices without losing sales ? So, as impressive as these numbers are they may in reality lead to less income simply because we may be pricing ourselves out of the market.
And there is a second but.
The same dramatic effect that I demonstrated above works also in reverse.
You see, discounting by 5% results in a bottom line profit result of just $5, which is a 50% DECREASE to your bottom line!
That is a 50% profit killer !
Peter Strohkorb
So, there you have the simple levers you can pull in your business to drive bottom line profit.
Next, talk to me about how to lift the sales revenue and profitability of your business!