I did a profit analysis by item and customer and determined that the company was losing money on 99 percent of the items and 99 percent of the customers. Drop those items after the old inventory was sold, and the business could also add two million dollars in cash.
The leader could then operate the business with three people and make over a million dollars a year in profit. He would only need to work an hour a day to do so. He liked that idea.
Most businesses think about selling more items or services as an opportunity. Why not?
Done properly, selling or providing more of what you already offer can be a big help in creating efficiencies. But sometimes you are serving virtually all of someone's needs for those items.
The application to a for-profit organization is obvious. What else can you profitably sell or provide at a fair price with desirable qualities and service that the customers you already have want to buy? The advent of the Internet makes this evaluation much more potentially rewarding because postal, air freight, and electronic delivery choices enable you to serve most of the world with your added offerings.
This for-profit challenge requires considering the potential volume and the effects on overhead costs and profit contribution margins. Example 1 shows the kind of effect that a positive change in volume can make by adding volume through more profitable items that do not increase overhead costs very much.
Example 1: Adding More Profitable Items to Expand Revenues Without Increasing Overhead Costs as Rapidly Further Speeds Profit Growth
This example shows the profit multiplying potential of increasing profit contribution margins from 30 percent to 40 percent while decreasing corporate overhead costs from 20 percent to 3 percent of revenues. The result is a 7,700 percent profit solution. If revenues could be grown even more, a 40,000% improvement (a 2,000 percent squared improvement) could result.
Annual Pro Forma Financials Before Volume Expands
Revenues $1,000,000
Cost of providing offerings $ 700,000
Profit contribution $ 300,000
Corporate overhead cost $200,000
Pretax profit $100,000
20 Times Volume Increase with Higher Profit Contribution Products and Limited Additional Overhead Expenses
Revenues $21,000,000
Cost of providing offerings $ 12,600,000
Profit contribution $ 8,400,000
Corporate overhead cost $ 600,000
Pretax profit $ 7,800,000
The challenge in making such a change is to focus on both higher profit contribution offerings and keeping overhead and operating costs low. The mistake that many make is to only look at the contribution percentage. When that happens, the gains in profitability may be eaten up by new costs to deliver the added offerings that more than offset the profit contribution of those offerings. Exhibit 2 demonstrates that point.
Example 2: Adding More Profitable Items to Expand Revenues Hurts Profits When Overhead and Waste Costs Grow Too Rapidly
The potential profit gains from higher profit contribution percentages (going from 30 percent to 40 percent in this example) can be more than offset if waste and overhead costs grow too rapidly in providing required items. Perishable, high-tech, and fashion items often have this problem as time causes value to decline, resulting in waste or markdown charges. Higher profit contribution offerings often require more administration and service to support them.
Annual Pro Forma Financials Before Volume Expands
Revenues $1,000,000
Cost of providing offerings $ 700,000
Profit contribution $ 300,000
Corporate overhead cost $200,000
Pretax profit $100,000
20 Times Volume Increase with Higher Profit Contribution Items and Faster Growth in Overhead and Waste Expenses
Revenues $21,000,000
Cost of providing offerings $12,600,000
Profit contribution $8,400,000
Added waste and markdowns $3,150,000
Corporate overhead cost $5,200,000
Pretax profit $50,000
How can these mistakes be avoided? The best way is to start with small experiments where you can measure the increases in volume, profit contribution, and costs before committing to a major change in your business model.
Gone are the days when building your own business is tedious, costly, and overwhelming. Today, with the power of internet, you can just create information products like e-books, newsletters, audio products, etc. and you'll have an instant business what can potentially bring enormous amount of money to your pockets.
Here's how you can excel with product creation:
1. Start with keywords. When choosing the best products to create, it would help if you can do a keyword search. Why? The search terms that are being used by your target market will surely give you an idea on what kind of products these people would like to buy. For more details go to: www.product-launching.com For instance, if they are constantly searching for "SEO tips", you will know right away that your potential clients are looking for ways on how they can learn the ropes of search engine optimization to pull up their search engine ranking and eventually, succeed in the online arena.
2. Connect with your target market. Visit popular forums and identify the common topics that are being discussed by your target market. You may also determine the pressing issues of these people or the things that they would like to achieve. You can convert all of these to profitable product ideas.
3. Check your competitors. Before you start developing your products, do you research and determine how many people are creating and selling the same products. You would want to avoid stiff competition as this can pull down your sales potential. You will also need to know the weaknesses of the people that you are up against as you can use these to your advantage and make your products more valuable and more impacting to the eyes of your target market.
4. Impress your customers. You'll stand great chances of excelling in this field if you put your customers and their needs on top of your priority list.
For can visit to: www.product-creation-innovation.com when developing your products, ensure that all the elements you use are geared towards addressing all the needs and demands of your prospects so you can easily get these people to buy your offerings.
5. Promote your products. Increase your sales and revenue by giving your new products the kind of exposure they need. You may advertise them using article marketing, forum posting, PPC advertising, ezine publishing, search engine market, banner ads, video marketing, etc. You may also hire affiliate marketers who can definitely help you make your advertising campaign more powerful.
Both Donald Mitchell & Pritpal are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
Donald Mitchell has sinced written about articles on various topics from . Donald Mitchell is an author of seven books including Adventures of an Optimist, The 2,000 Percent Squared Solution, The 2,000 Percent Solution, The 2,000 Percent Solution Workbook, The Irresistible Growth Enterprise, and The Ultimate Competitive Advantag. Donald Mitchell's top article . to your Favourites.