A service business has incredible opportunities for fast growth, probably a LOT more so than retail.
That’s the opinion from this humble mentor’s experience over 21 years with helping hundreds of businesses in manufacturing, wholesale, importing and of course retail and service businesses.
How is a service business different and easier to grow faster than a retail business?
Retail is hugely dependent on the shop location for its success and overall traffic to that area, shopping centre or strip where the shop is located.
A retail business has a tangible product to see and touch in most cases, which the consumer uses to determine the value of and to make a buying decision. Its also easy to compare product with product in a retail business.
Service businesses don’t have those same advantages.
Take the common trade service business, such as an electrical or plumbing contractor.
While they are selling relatively well known services, they are still selling an intangible commodity, time.
A trade service or any other service business is really selling time, that is required to carry out the service, which is an ‘intangible.’
Selling intangibles is both a greater challenge and a greater opportunity.
When you’re selling an intangible, TRUST is a major ingredient of winning the sale.
Think about the most recent service you’ve purchased, and what went on in your mind during the quote/meeting/discussion.
Did you like or relate to the person who talked to you and gave you the price?
The most common answer to this question is YES.
When you like and/or relate to people, you trust them more, and so this is a great principle to use to increase sales and to sell with higher value or higher prices.
Converting more quotes into customers is about increasing conversion rates – a KPI that is given very little attention in service businesses, and a great opportunity for fast growth.
Converting more quotes into sales is a skill that can be learned, easily, rapidly and cost effectively. In fact, just in one day.
Often the result seen with our clients is a 20% to 50% increase in sales in a week to a month! That’s a similar increase in income for the business too, that increases yearly turnover by the same amount.
Would you like a 20% to 50% increase in your weekly and yearly income?
Is that fast enough growth for you?
That’s just one area to grow your business faster.
In a service business there are actually 7 main growth KPIs or figures in total to focus on improving, to grow your business.
The important Growth KPIs to Focus On Are…
- Number of Leads
- Conversion Rate of leads to sales
- Raising Prices
- Average Sale Value
- Number of Transactions per year (existing clients buying again)
- Gross Margin on jobs
- Reducing Expenses
To increase any figures, you need to start by measuring them, and all of these are good to know, measure and monitor frequently.
The primary focus in business is often lead generation and what’s popular is to try and increase leads using PPC like Adwords or Facebook ads.
To only focus on one of the 7 growth KPIs is turning a ‘blind eye’ to greater growth opportunities because tiny increases of just 5% in all of the 7 KPIs can make a HUGE difference to the turnover and net profit of your service business.
A 5% increase in each of these by applying various strategies would lead to a big increase in net profit too. Far more than 50% – without a 50% increase in turnover (and employees).
Here’s a screen shot of the Business Profit Calculator, showing revenue and net profit figures before and after a 5% increase…
It’s showing an enormous net profit increase, and that level of result is actually achieved more regularly than you would believe with our clients.
A 50% increase in turnover and net profit from lead generation alone also means 50% more employee hours (and employees) are needed as well.
Which outcome sounds better to you – increasing net profit only or turnover and net profit?
A net profit increase using up to 7 KPI figures and strategies is a much better, smarter way of thinking about growing your service business fast than simply lead generation.
A little known fact is – increasing how much customers spend by 10% of the average sale value, is nowhere near as powerful as increase prices by 10% or even 5%.
A 10% increase in the Average Sale Value will increase turnover and net profit by 10%.
A 10% increase in prices will increase net profit by much, much more than 10%!
How much increase depends on the business’ existing net profit percentage or margin.
If the net profit margin is 5%, the 10% price rise won’t increase it by 10%, it will increase it by far more!
On a 5% net profit margin business with a revenue of $1,000,000, the net profit would be $50,000.
With a 10% price rise, the revenue increases by 10% and therefore goes to $1,100,000 and that $100,000 revenue increase is all net profit, which is added to the original $50,000.
The new net profit is therefore $150,000, so its 300% higher from the price rise!
Which is more relevant, to increase revenue or to increase net profit?
Obviously its net profit (and net profit margin).
A higher net profit means more cash in the bank – and who doesn’t want that?
To grow your business faster, its best that you don’t focus on lead generation only. In fact, if you want to increase net profit margins, increasing leads won’t increase your business’ figure.
And when revenue increases year to year, do you think net profit margins increase or decrease in most businesses?
After looking at hundreds of clients’ business Profit and Loss Statements over a 3 year comparison period, a huge 93% of all of them experienced a lowering of the net profit margin from year 1 to year 3, even if net profit increased.
That’s what is often never noticed.
What’s your business’ net profit margin figure – for all 3 of the previous years? Has it increased or decreased each year?
When a business experiences a decrease in the percentage, it means the business generally has less cash available more often, which is why its important to see the trend, before it becomes a reality. Food for thought?
A Fast Business Profit Growth Secret
To grow your business faster, focus on net profit MARGIN increasing strategies.
That’s where another one of the 7 KPIs becomes relevant – the Gross Margin on Jobs.
Look at where you’re making a higher gross margin, by the “types” of jobs you are doing.
Different customers want different types of jobs carried, out and each type of job can warrant a different gross margin.
What you need to do is collate all jobs of the same type for a month and compare gross margins across each type of jobs.
SimPro and Aroflow can be modified to do this and its extremely worthwhile to do this exercise.
You’ll then be able to see your 80:20 Rule where 80% of the work you do isn’t that profitable, only 20% is.
When you identify your ‘range’ of gross margin on all job types, you may find the lowest gross margin average on jobs for a month is 30%, and your Expenses are also 30%, which means you’re not making any profit on those types of jobs, averaged over the month.
You may also find that 20% of jobs you make 40% gross margin on, and with your Expenses at 30% you are then making 10% net profit margin.
However, since that’s only 20% of all the jobs you do, your overall average net profit margin is closer to the 0%, not the 10% so it averages 3% or 5% on the yearly figure.
This is extremely common but rarely thought about or discussed by accountants, but its super important to understand, if you are serious about growing your business faster, and increasing your business’ net profit MARGIN.
Measuring and knowing all of your jobs’ gross margins and gross margins by types of jobs is extremely important.
Don’t just look at all jobs individually, collate them all into “types” of jobs and average all figures by types for a whole month to see the average.
Your Profit and Loss Statement shows you the average gross and net profit and margins, not the range. The range is what you want to know.
Because then you can increase the low average gross and net profit margins on job types with small price rises, so you aren’t making a loss on any job types.
And you then need to focus on increase conversion rates on high gross margin jobs and increasing leads just for these types of jobs too.
By taking this ‘dual’ approach to margins, its very easy to add 5% to 20% to the gross and net profit margin figures in your business.
That makes a MASSIVE difference to your business’ net profit, margin and cash levels in the bank.
Here’s a plumber talking about his profit increasing result with his business by applying these principles in detail from our Academy of Business Mastery program…
Milton did exactly what is explained above. He identified his ‘types’ of jobs, measured them for a month, found the loss making ones and raised prices on those. He found his high gross margin jobs and chased the work or focused on converting more quotes to sales to increase the volume.
Overall his net profit increased over one hundred thousand dollars, without any increase in leads or marketing time at all. It transformed his business and quality of life.
Where can you start to focus more to increase your business’ net profit margin?
Which of the 7 KPIs above do you need to measure and apply strategies to for an increase in net profit?
Would you benefit from a discussion with a mentor about where you need to focus and what strategies of the hundreds available to all 7 KPIs would you like to know more about and to implement?
Growing your business faster isn’t hard, it’s about working and being SMART and focusing on a lot more than lead generation and marketing with your business growth strategies.
Help is always available if you want it and ask for it.