Although you might do almost everything right in your business, you could still struggle to scale it up because of low margins. However, you may not even know the reason why your margins are low.
Fortunately, John Lincoln, the CEO of Ignite Visibility, a full-service marketing agency, has extensively researched why companies are hamstrung by low margins and discovered the answer to the baffling problem of how to improve them.
In his article, How To Scale A Business To $1,000,000 A Month And Beyond, he explains that businesses with low margins can usually fix this problem by running routine audits, reducing customer acquisition costs, reviewing their existing sales mix, and reducing corporate waste.
A routine audit is checking your business’s daily transactions in its books of accounts. This may include reviewing such things as Petty Cash, Time and Effort Activity Reports, Telephone Usage, and so on. An Internal Auditor’s junior staff usually does this work.
Lincoln suggests that auditing outgoing expenses and incoming earnings will reveal where costs are unnecessarily higher or where a revenue stream is drying up. Once you understand how your money is coming in and going out, it will be easier to manage.
Customer Acquisition Costs
You can reduce your customer acquisition costs by identifying the right customers for your business, boosting your conversion rate, and re-examining your customer retention strategies.
By inspecting your customer acquisition costs, you’ll be able to come up with fresh ideas to reduce customer turnover and automate more of your marketing efforts.
One thing you have to keep in mind is that 80% of your business will come from 20% of your customers (the Pareto Principle). So, you have to be able to identify the characteristics of the 20% of responsive customers and spend more money acquiring them. You also have to spend less money on the 80% of customers who rarely buy your products or frequently abuse your refund policy.
“To reduce your costs,” says Lincoln, “you’ll want to identify your most profitable customers and focus your more expensive marketing efforts to reach more people like them.”
Your sales mix is a technical term that means calculating how much each product contributes to your total sales. This evaluation will help you identify unprofitable products that you are overproducing and profitable products that you are under-producing.
This is the process that Steve Jobs used after Apple invited him back because the company was suffering alarmingly low margins. After he noticed that Apple was making too many unprofitable products and too few profitable ones, he reduced the variety of items and focused on a few winners. Today, Apple is the first company in the world to hit a market capitalization of $1 trillion.
Lincoln suggests shifting your strategy to offer the right mix of products to keep a higher level of profitability.
Reduce Corporate Waste
Many corporations are not aware — or only peripherally aware — of how much money they lose by making recurring payments for inventory that doesn’t sell, product spoilage, and other forms of corporate waste.
This type of waste can even show up in an intangible form, such as wasting time on tasks that don’t need to be done at all.
Lincoln suggests identifying where your company may waste resources and use automation tools to improve tracking usage.
By auditing your income and expenses, reducing your customer acquisition costs, reviewing the profitability of your company’s existing sales mix, and reducing corporate waste, you’ll be able to identify and readjust the ones responsible for your low margins.