Did you know most owners have a legitimate super-power at their disposal? Want to know what that super-power is?
It is your power to identify, select, and focus upon the offerings that produce profit most efficiently for your business.
To understand how that’s done, let’s say your business is a lemonade stand and that you sell three products: lemonade, hot dogs, and chips.
- Lemonade sells for $1 per cup, 400 units per week, at a gross profit of 80%
- Hot dogs sell for $2.50, 160 units per week, at a gross profit of 50%
- Chips sell for $1.25, 140 units per week, at a gross profit of 70%
Which offering should you emphasize selling? Getting the right answer is the first step in using your super-power to your advantage, so let’s do that now!
Using Your Super-Power
While the table above is often representative of the info a business owner has or knows, it doesn’t make obvious the information you need to make good decisions. So, look at the one below which shows the info that makes decisions clearer – by showing how much periodic gross profit each offering produces, in order of efficiency.
Identifying Your Winners
Based on this table… lemonade is the clear first choice to emphasize. It has all the key advantages: it produces the greatest sales volume, has the widest gross margins and produces the most profit over time.
For sure, using your super-power to your advantage means that your business’ version of “lemonade” – if it has one – should be emphasized above all else! It produces ten grand more in gross profits than chips per year… and six grand more than hot dogs per year.
The comparison between hot dogs and chips is more complex. Chips generate a higher gross margin than dogs… Dogs generate more volume than chips and at a higher price.
So, after doing the math and looking at the results (reflected in the table above), we find that dogs produce $4,000 more per year in gross profit than chips – largely because of the price point and sales volume advantages they have over chips.
This means profit headway may be best made by emphasizing those offerings that sell in strongest volumes with the greatest amount of profit in dollar terms.
In this simplified study, that means emphasizing and promoting lemonade above all, and hot dogs over chips. Doing so, and influencing sales volumes accordingly, could literally make tens or even hundreds of thousands of dollars difference in profit for your business!
The key for you, of course, is to figure out which of your business' offerings are most like lemonade, hot dogs and chips. And we've got this tool to help you:
Small Guys Tend to Ignore Their Super-Power
When businesses ignore this super power, their financial results are often muddled and below maximum potential. And I’m often reminded of how much small businesses miss out on using their super-power – oddly enough when I’m in a big box store checkout line!
Big boxes know how to use their super-power! You know that soda or candy bar you buy in the checkout line… don’t think for a second that’s there by accident or not among that store’s most efficient profit producers (high sales volume + high profit margin). Same thing for all those special promotional displays in high traffic areas around the store.
But since I’m a small business guy, I much prefer to see these things when my small business friends use this same super-power to their advantage. How? When they focus on promoting, packaging, positioning, and selling their own most profit-efficient offerings so that they lead to highest possible level of sales.
First, do your own lemonade stand study… then build your practices to maximize sales of those things that you know will produce the most profits for your business.
I know some may read this strategy as being greedy… but in my experience in small business, it is not. In reality, it is necessity for the long-term survival of most small businesses! Ignore your super-power, and more than likely you’ll fall prey to kryptonite.
Undermining Your Super-Power
One other scenario to be careful to avoid is when a business actually undermines their super-power by over-emphasizing their least profit-efficient offerings – in hopes of improving their business performance.
For instance, let’s say a lemonade stand owner notices its chips sales volume is less than hot dogs and lemonade and does everything possible to boost chips sales – with little improvement. Meanwhile, due to less emphasis on selling them, lemonade and hot dog sales drop.
That’s bad news. In effect, this is a scenario where trying to improve the weakest link ends up being counter-productive. So, often business are better off putting their precious promotional dollars and energies behind maximizing sales of lemonade and then hot dogs – or those offerings that can/will sell in larger volumes and produce optimal profits.
In closing, I want to say I fully realize this business of deciding upon which offerings to emphasize can be quite complex “in the real world.” Though the examples in this commentary are intentionally simplistic, it’s not always that way in real life.
Many businesses must offer certain low profit-efficient items to get traffic “in the door” to buy more profit-efficient offerings. And, believe me, I get that.
Therefore, if your business faces difficult or complicated decisions and needs help analyzing how to optimize its offerings for profitability, I encourage you to contact us here if we can be of help to you.
Long live small business! Long live small business owners!
Jim Smith, CFP, Founder, PERFORMIDABLE, LLC