For many business owners, the first strategy that they will adopt in an attempt to drive business growth is to acquire more customers. But the number of customers you have is just one of the three drivers of revenue:
Number of customers x Number of times they buy from you on average x The average amount they spend = Revenue
A very simple equation really. So why do we put so much focus on the first one and neglect to actively address the others? The answer is usually because we think that acquiring more customers is less uncomfortable than “convincing” our valuable customers to buy more or spend more.
We have already encouraged our customers to buy from us and we fear scaring them away by increasing our prices or asking them to buy more. It is something that I see all of the time in business. Business owners complain that they are working tirelessly without reaping the reward of all of their hard work. The problem nearly always revolves around their attitude to profit maximisation.
You see, the acquiring of new customers is actually the most long winded of the three drivers of revenue growth. It involves time and cost in marketing, capturing and following up leads, tendering and eventually agreeing a deal with a new customer. By working on your existing customer base, you might just be able to make small improvements to your numbers without much, if any, cost. In some circumstances, I have seen businesses transform their profitability instantly by tweaking one or two numbers in their business model.
Let’s have a look at an example:
Stevenson’s Plasterers last year achieved a 17% gross profit, earning £30,600 profit before overheads:
Stevenson’s Plasterers year ending 31st March 2013
| Revenue | 180,000 |
| Cost of sales | 149,400 |
| Gross Profit | 30,600 |
Imagine Stevenson’s Plasterers had increased their prices by 10% and they lost 10% of their customers as a result. Here’s the effect on the profit:
| Revenue | 178,200 |
| Cost of sales | 134,460 |
| Gross Profit | 43,740 |
Revenue has reduced by £1,800 but cost of sales has reduced by £14,940 (*if you’re interested in the maths, see the calculations below). Overall, gross profit is therefore increased by £13,140. So the business is making MORE profit and has LESS customers to deal with.
Getting the right pricing can transform the results of your business with an immediate impact. Higher profitability allows for better staffing, which will ultimately enable you to build a better business. Remember, a business is something that works without you.
* Losing 10% of your customers results in a £18,000 drop in revenue. However, the £162,000 of customers that remain have a price increase at 10%, giving £162,000 + £16,200 = £178,200. Revenue has fallen by just £1,800. Cost of sales has reduced by 10% because you now have 10% less customers.
