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Thursday, 25 October 2012

Get Profit from your Sales

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English: Cost-Volume-Profit diagram, showing b...
English: Cost-Volume-Profit diagram, showing break down of Sales into Contribution and Variable Costs. (Photo credit: Wikipedia)
A recent blog post on pricing reminded me that we tend to forget how important it is to make a profit and often how little room for manoeuvre there is when playing around with prices.

The average profit for all limited companies across the UK before 2008 was 7%, yes that's £7 out of every £100. I'll accept that many smaller businesses typically owner managed will depress their reported profits in order to reduce their tax liability.  Having said that there's not many businesses that regularly report profit before tax of 10% or better. What that really means is that pricing and getting it right is really important.

So point number 1 you need to understand fully what it costs you to produce your product or service. I don't mean guess it I mean know it intimately and in detail.  Recently I went to what appeared to be a reasonably successful retailer who were struggling financially. Superficially things appeared OK nevertheless I asked them to fill out a detailed spreadsheet itemising all their costs and not surprisingly their situation was much worse than they anticipated. What it had done was to get the business owners to focus on what it really took to run their business and that pricing was a much more important than perhaps they first realised, as a result now everything is priced on the basis that it makes a profit in its own right and in some cases that has meant a significant increase in individual product prices.

 For companies with a sales team, this message often gets lost, particularly as most sales people are rewarded against sales revenue and not profit per sale. Consequently if sales people are in a sticky position they automatically reach for the price lever and drop the price, after all a 10% discount on a 100k sale is only 10K  and that's relatively easy to find. The fact that it may have completely wiped out the profit on the sale is not on their radar.

So point number 2 get your sales team to focus on profit and not turnover. How can yo do this? Well how about giving them a little bit of training so they understand the mechanics of the business, and you could reinforce this by rewarding them on profit not turnover.

I've only be able to do this once but boy is the impact immediate. No more is there the argument that we had to sell this with a big discount to give us a foothold in this new account, nor is there the plea that "if I didn't give him that discount(and its usually a big one) we wouldn't have won the sale."  Why, because sales people don't want to go through all the effort needed to win a sale and end up getting no commission.

Interestingly what you do get are rather more searching questions like what does it cost us so much make this stuff, what else can we offer if we cant move much on price? This should lead both you and your sales staff to examine and really understand your company's value proposition and discover how to best promote them, which is no bad thing.

The important messages are that as a business owner, profit should be your prime motivator when selling. In order to do this you need to understand what your true costs of production are before adding in your profit and only after that setting your price.

Motivating your sales using profit has some beneficial side effects in forcing them and indeed to you really understand and to be able to justify why you sell what you sell at the price you sell it.

Exigent Consulting provides specialist services for High Growth BusinessesBusiness Turnaround, and Mentoring to the Small and Medium Business. We help business owners improve the profit performance of their business. 

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