BUSINESS IS A process of continuous improvement. Whether you’re a Fortune 500 company or a small-town trader, we are constantly being reminded that growth is necessary just to keep up with last year and to stay in touch with what the competition is achieving.
It’s easy to see the need to grow as an insurmountable task. If you want to improve your bottom line by 10 percent, adding $100,000 of sales to a $1 million business sounds like a big challenge. Yet sometimes, the process can be more achievable if taken as smaller steps.
Let’s say Joe’s store sells 1,000 items at an average price of $1,000 with 100 percent markup. His $1 million of sales will deliver him $500,000 of gross profit. If he wants to increase this by 10 percent, he can increase his units sold by 10 percent. This sounds challenging, but it can become a far more achievable objective if we break it down.
Joe can achieve his objective by increasing his average sale by 4 percent, his units sold by 4 percent and his markup by 4 percent. Let’s see the numbers now:
- 1,000 units become 1,040
- $1,000 average sale becomes $1,040
- 100 percent markup becomes 104 percent
His new sales figure is $1,081,000 ($1,040 x 1,040 units), and his markup of 104 percent gives him a gross profit of $551,000. A target that seemed more challenging has suddenly become a lot more manageable.
One of the most effective ways a small change can make a big difference is price pointing of product. A store owner I know made the decision to add 99 cents onto every item they re-stocked up to a point of $200. If an item was selling for $69, they would adjust the price to $69.99, $124 would become $124.99, and so on.
This small adjustment in pricing, although insignificant on an item-by-item basis, was calculated to add over $7,000 to their bottom-line profit over the space of twelve months — a relatively good return on the small amount of cost and effort involved in repricing these items as they arrived in the store. For a business earning a profit of $100,000 per year, this would represent an increase in the bottom line of 7 percent.
Can you think of any easier way of improving your profit by 7 percent this year? Often, it’s the small changes that can have the greatest cumulative effect. A meal is always eaten in bite-sized chunks.