Profitably Serving Happy Customers
As business owners we have much in common. In addition to the excitement, challenge, and long hours we are also bound by the common law that determines our success or failure. Divination, astrology and physic readings may help with the journey but a sure-fire way to see the direction our business is headed is to simply answer the question: “Does my business profitably serve happy customers?”
Consistent profit is a necessity for small business. A large business may have the connections and resources to survive tough times. If a large business takes its eye off the ball its owners often have the option to restructure or hire new management. A small business does not enjoy such luxury. If making our customers happy generates a consistent, sizable profit we will remain in business to serve them. If not, our business will be among the 50% that fall by the wayside.
Here are a few tips that will help you remain in business to make your customers happy.
#1: KNOW YOUR UNIT COST: If there is one number that will help you gain control over your livelihood it is the true cost of providing your product or service (also called Unit Cost). If a builder, what is the cost of the next house or addition? If a restaurateur, what is the exact cost of preparing and serving each item on the menu? Find your unit cost by adding all outlays directly related to the creation, purchase and delivery of each product. Building a house? Include land, materials, fees, and any outside labor hired to complete the project. Serving a hamburger? Add what you pay for the patty, bun, ketchup, mustard, and vegetables. If in a business where customers buy items in batches, taking this process a step further to determine the cost of an average sale. This can be accomplished by adding the cost of items generally purchased together (entrée, side and drink). Have a service business such as housecleaning? Include cleaning supplies, employee wages (plus taxes) and travel cost. These expenses are often called “variable” costs because they “vary” directly with the number of sales. Do not include costs you would have to pay anyway such as office staff, insurance, rent, mortgage payments, and salaried employees, etc.
Unit Cost is the sum of expenses directly associated with creating and/or supplying a particular product.
#2 KNOW YOUR PROFIT: Once you know the actual cost of the products you sell it is easy to find the profit made on each item. Simply subtract the unit cost from the sale price. The difference is called gross margin or gross profit per unit. Unit gross profit represents the amount of money left over from each sale to cover all other expenses including your pay, your retirement savings and a profit to reinvest.
Product Price (minus) - Unit cost = Gross Profit per Unit
#3 KNOW THE NUMBER OF SALES YOU NEED (Volume): Now we have arrived at the moment of truth. How many houses must you build? How many meals must you serve? How many homes need to be cleaned? To find this out, add all your business’s remaining costs (those not included in unit cost). These outlays are often called “fixed costs” or “overhead” and they tend to stay the same over a given period regardless of the number of sales. Remember to keep the time frame consistent. For example, to determining sales needed per month be sure to add a portion of items paid at different intervals (such as 1/3 of insurance payments made every three month, etc). Also be sure to include your desired income and the profit your business will need to generate during the same period.
Fixed Costs (also called overhead) generally remain the same from month to month regardless of an increase of decrease in sales.
The number of sales needed to achieve your goal is determined by dividing this grand total by the gross profit per unit. Once armed with this information you are in a position to realistically assess your goals and systems. If the number of customers you need is doable … then get to work. If not, it might be time to take a closer look at your costs and pricing policy.
Number of Sales You Need (Fixed costs + Owner pay + Profit) / (divided by) gross profit per unit = Number of Sales Needed
Profitably Serving Happy Customers is an immutable business law. Understanding the relationship between cost, price, and volume is an important part of achieving your potential. If you have any questions, please give us a ring to make an appointment. It is important is to us that you—the entrepreneur, the risk taker, the decision maker—develop an understanding of how cost, price and volume directly influence your plans, goals and livelihood. This understanding will ensure a win-win relationship as you confidently focus your energy on keeping customers happy.
Photo Caption: If making our customers happy generates a consistent, sizable profit we will remain in business to serve them. If not, our business will be among the 50% that fall by the wayside.