The Universal 5-Point Profit Growth Formula

August 16, 2021 | Roger and Susie Engelau

If you’re like most small business owners, you feel like you’ve tried many strategies to increase profit. There’s a universal formula called The Profit Growth Formula that any small business can leverage to produce more customers, more revenue and more profit consistently and predictably.

Warning… this is nuts and bolts math and it makes some of us want to run screaming for the door BUT, it is an incredibly universal concept that any type of business can, and should, use. Everything in your business rests in your understanding of it.

Here we’ll describe the 5 components of the Profit Growth Formula, put some example numbers to each component, and then list the main strategies you can use to effect an increase in each of the 5 components… and all of those strategies are concrete, practical, bottomline actions you can take.

The 5 Points of the Profit Growth Formula

1 Leads – the result of a targeted, effective, continuous marketing effort to produce qualified leads – those who value who you are and have expressed interest in buying
2 Conversion Rate – the percentage of those qualified leads who actually buy what you’re selling, the work of your sales processes
3 # of Purchases – the average # of times a customer purchases from you each year
4 Average $ per Purchase – the average amount of each sale
5 Gross Profit Margin – the percentage of profit made from each sale

The formula goes like this:
Leads x Conversion Rate = New Customers + Retained Customers = Total Customers x # Purchases x Averge $ per Purchase = Revenue x Gross Profit Margin = Gross Profit – Overhead Expenses = Net Profit

As you can see, the Profit Growth Formula is about customers in the door and how much they spend. There are hundreds of key performance indicators a company can choose to monitor how your business is doing financially. But at the end of the day, there’s no getting around that the 1st basic key performance indicator is whether or not you have an increasing number of ideal customers who spend an increasing amount… that’s what’s going to drive consistent revenue growth. It’s kind of like when you want to lose weight. There’s the Keto, the Whole 30, the Atkins, the lowfat diet, etc… but at the end of the day, the measures that are going to get you that weight loss are fewer calories consumed or more calories burned off!  Whether or not you’re increasing the number of ideal customers is the foundation factor that drives profitability.

Now let’s put some numbers into the formula to get a more concrete sense for how it works:

Let’s say you generated 500 leads over the last year and you converted 20% of those into customers.
So 20% of 500 leads yields 100 customers. Let’s say you already had 250 customers. Now you have 350.
Let’s say those 350 customers buy on average 2 times/year and spend on average $500 each time they purchase. That’s $350,000 in revenue.
Let’s say your Gross Profit Margin is 56% x $350,000. That’s $196,000 in profit.
Subtract your overhead expenses, in this case we’ll say $50,000 and that leaves you with a Net Profit of $146,000.

(Click for a larger download of the Profit Growth Formula with additional example)

Now let’s see what happens if you effect even a modest increase in each component of the Profit Growth Formula by 10%–just 10% more in leads generated,10% more leads converted, 10% more purchases per year, 10% more in average $ per sale, and you bumped your Gross Profit Margin to 61.6%. As you can see in the illustration, a modest 10% increase in each component of the formula produced a much-more-than-modest 58.6% increase in Net Profit!

The results demonstrate the power of the formula to leverage modest improvement efforts to produce big results.

Strategies to Increase Each Component of the Profit Growth Formula

Now let’s get into the nitty-gritty and talk about the top strategies to get those increases. Here’s a list of the strategies we think yield the best results:

 

1 Strategies to Increase Leads
      • Create your Unique Selling Proposition, your USP. This is about supply and demand—the more unique you are, the greater the market’s demand for your uniqueness.
      • To give your customers peace of mind when buying from you, create a Guarantee,“100% satisfaction guaranteed or your money back” for example.
      • Determine and clearly define who your Ideal Customer is (and who it isn’t).
      • Determine and clearly define your Target Market
      • Turn your marketing from an expense to an investment by leveraging the 2 sides of marketing:
        1. Reduce acquisition cost: you invest $300 in ads and get 10 customers, so you paid $30 to acquire each customer.
        2. Increase lifetime value: a new customer spends $550/year for 6 years, so that’s $3300.
      • Test and measure the results of all marketing efforts and stop doing any that don’t bring in new customers.
      • Use the Rule of 10 x 10. Employ 10 marketing strategies—flyers, networking, referrals, direct mail, ads, etc. It drives you to test other methods you might not have tried that could be far stronger than your current methods!

 

2 Strategies to Increase Conversion Rate
      • Use scripts – in other words, figure out who on your team is converting leads to customers most successfully, then write scripts based on what they say, even have them write the script, and train all others with that script.
      • Use testimonials
      • Always “ask for the sale”
      • Make it easy to buy. Look for obstacles that can prevent customers from buying from you.
      • Learn to ask great questions that uncover the customer’s interest in your USP and listen, listen!

 

3 Strategies to Increase the # of Purchases per customer
      • Maintain a database of clients and prospects – You can buy lists of customers who exactly match your target market and put all those contacts in a CRM system, which is your database. If you don’t’ want to purchase a CRM system just yet, you can certainly maintain them yourself on an excel spreadsheet. A good CRM system, and we know a few, will help you track the communications and progress with customers.
      • Keep in regular contact with your clients –a newsletter works well
      • Create some magic for customers with your produce/service delivery
      • Utilize a frequent purchaser program such as VIP clubs & service contracts
      • Win past customers back with a special event just for them

 

4 Strategies to Increase Average $ per Purchase
      • A strong USP and Guarantee creates a greater value perception which allows you to increase prices and stop discounting
      • Provide an easy way to finance the transaction or payment terms to reduce the price-affordability concern
      • Train salespeople to up-sell & cross- sell using checklists
      • Create package deals
      • Measure average $ per purchase

 

5 Strategies to Increase Gross Profit Margin – increasing the percentage of profit made from each sale
      • Segment your customers A – D and sack C’s & D’s
      • Assess overhead expenses: Goal – 10% reduction in total expense
      • To reduce your cost of doing business: Systematize the routine, humanize the exceptions
      • Raise your prices by 10%
      • Sell more high margin items
      • Track & minimize non-productive time/labor

 

It’s a good rule-of-thumb to review the 5 components of the formula monthly to identify weak areas.

The Profit Growth Formula is universal and can be applied to any small business no matter what you sell or whether you have 5 or 150 employees. It can be a road map for producing consistent and predictable customer growth, revenue growth, and profit growth.

While it’s a bit tedious for some of us, your business success rests on you understanding it.