Profits are the lifeline of small businesses. As your profits increase and become more predictable, your small business has a greater chance of surviving—and most businesses don't. In fact, only around half of businesses tend to make it past the five-year mark, according to data from the Bureau of Labor Statistics.
Because of this survival rate, every day counts when it comes to turning and increasing your small business profits.
Most of the time, small business owners can't afford to wait for the results of long-term, large-scale changes to their business model. As much as possible, if you want to turn a bigger profit as a small business owner, the quicker you can do it, the better. The following simple changes can help you get started maximizing your profitability right away.
7 Simple Strategies to Maximize Profit
1. Convert One-Time Clients Into Recurring Clients
There are many reasons why converting your customers into repeat clients can quickly improve your profitability. Recurring customers tend to spend more and purchase more frequently than new customers.
A study conducted by Rosetta, a consulting agency, showed that "engaged customers"—satisfied repeat buyers who advocate for a brand—are the most valuable customers a business can have. Not only do they spend 300% more than typical customers, they are also two times more likely to buy upsells and six times more likely to try new products from your business.
Repeat customers also contribute to the longevity of your business. A study of e-commerce sites showed that by their third year of business, revenues are mostly dependent on returning customers and referrals. In other words, recurring revenue helps businesses maintain the predictability of their profits and possibly helps them avoid the fate of businesses that close before reaching year five.
There are many ways to convert your clients into more engaged, repeat buyers that help maximize profit. Here are some of them:
- Have offers with recurring billing. Another way to get return customers is to turn your small deals into long-term billings. This might include scheduled maintenance, such as a lawn care business providing monthly garden care, or a website developer offering monthly website security checks. You can also offer subscription-based services relevant to your business. For example, if your business is a hair salon, you can offer customers the chance to subscribe to a monthly refill of hair care products delivered to their door, and even include reminders on touch-ups on their haircuts.
- Keep in touch with customers. Never let a transaction be the last point of contact between you and your customer. One way to do this is through an email autoresponder sequence, which you can trigger to automatically send regular emails to your customers after they purchase online or subscribe to your email list. You can also use handwritten notes such as GreenPal, a lawncare service, did. After a customer's third transaction, they receive a handwritten "thank you" card from the service, Kissmetrics reports. As a result, they've seen a decrease in customer churn.
- Give discounts on shipping, not products. One common mistake that small business owners make is that they give away discounts to encourage new and repeat purchases. The problem with this approach is that it cuts into your profits and sets a lower price expectation on your products and services. A study from the University of Florida found that offering "free shipping" encourages more frequent orders and "is the most effective policy in terms of customer acquisition". So instead of discounting your products or having sales, regularly give discounted or free shipping.
2. Encourage Referrals
According to a survey of over 1000 small business owners, referrals are the number one driver of new business. If there's one marketing channel that can maximize your profits, referrals would be it.
A good referral often has minimal or no costs, plus potential customers tend to give weight to the opinions of people they already know. In fact, research from Nielsen shows that 84% of consumers trust product recommendations from family, colleagues, and friends.
An example of a sophisticated referral campaign was conducted by Bomgar, which provides remote desktop software. They sought out their most avid customers and created a customer advocacy program which allowed their customers to earn points by creating referrals and providing testimonials. These points can be redeemed in exchange for perks and gifts. As a result of this program, Bomgar saw a 700% increase in referrals.
While you don't have to create something as complicated, there are probably simple things you can do to encourage your satisfied customers to refer your business to their contacts. Consider testing out the following:
- A referral program with discounts and perks in exchange for referrals, similar to the Bomgar example above.
- Create a customer experience that demands to be shared. One example is fashion retailer Everlane, which encourages customers to share photos of their products on social media. A simple search for the #everlane hashtag on Instagram reveals a lot of customer-created content featuring Everlane products.
- Encourage public reviews and testimonials from satisfied customers. After purchasing from you, customers should be encouraged to post reviews on social media. This can be risky when it comes to bad customer experiences, so make sure that your customer service and product quality are in top shape.
3. Drop Low Performers
To figure out which of your products or services should be discontinued, you have to prepare an income statement for each of your income sources. This will let you know how much profit and expenses each of your products and services bring in to the business.
Basically, for each product, you'll list the total gross amount of sales and subtract all the costs associated with creating and selling that product. A simple formula would be the following:
Net Income from Product = Total Amount of Sales – Total Product Costs
(If you need more details on how to compute this while taking both fixed and variable costs into account, check out this thorough guide.)
Once you're done computing your net income for each of your products and services, find out:
- Which products and services give you the lowest net income? These are your underperforming products and services.
- Are there products and services that you're actually losing money on? These are your unprofitable products and services.
- For those unprofitable or underperforming items, would getting rid of them also get rid of the expenses associated with them, or will these expenses be passed on to your remaining products?
- For those products and services that are unprofitable or are underperforming, would getting rid of them affect the sales of your remaining products? For example, if customers usually try your business by buying your underperforming products, but then they follow up by purchasing your more profitable products, then getting rid of your underperforming products might affect the sales of your other products negatively.
An entrepreneur who has dropped low performing products successfully is Sarah Gilcher of PerennialPlanner, which sells printable organizers. According to an interview with Brilliant Business Moms, Gilcher originally sold baby products and downloadable printables. Since her printable products were selling more, and these products were less time consuming to create and sell, she dropped selling the baby products and focused on the printables. This led to at least 3,000 sales in a year.
Going through the performance of each product and service in this way can help you find out for certain how much they contribute to your bottom line—and whether you're better off focusing on the few that really deliver.
4. Offer Upsells or Cross-Sells on Popular Items
You can also focus your efforts on selling customers other products (cross-selling) or offering them a higher priced option (upselling) as they are transacting with you. This raises the average profit you get per transaction or per customer.
An upsell would mean that as a customer is buying a product, you offer them a higher priced option from the same product line. For example, FreshBooks, an online invoicing company, offers a monthly subscription worth $19.95, but they highlight a package worth $29.95 as the recommended option, which is a higher-cost package with more features.
An example of a simple cross-sell are the add-ons in the products of Tumbleweed Houses, a company that sells plans for tiny homes. In the example below, as you add their building plans to your shopping cart, you also have a quick option to add a Construction DVD for $59.95—a small fraction of what you're already paying for the plans. While there are also links to other add-ons such as workshops or trailers for your tiny house, it's only the DVD that you can easily add to your cart as you're shopping for house plans.
It's worth noting that according to a study from research firm PredictiveIntent, upselling tends to perform 20 times better than cross-selling. So if you're considering which tactic to try first, see what upsells you can offer on your most popular products.
5. Remove or Delegate Non-Essential Tasks
Small business owners are notorious for taking on too much work, since they often cover everything from customer support to product creation to marketing. If you find yourself doing too many administrative tasks, consider if those tasks are essential to keeping or acquiring customers.
You can delegate some tasks that take your time away from doing more profit-generating work. For example, good customer service can lead to more purchases and increased value of purchases, according to a report from McKinsey. If customer service takes several hours out of your week—hours that could be better spent on higher-level tasks such as marketing and business planning—then delegating it might open up more opportunities for your business to grow.
Apart from delegating, don't forget to eliminate as well. For tasks that you repeatedly do that don't seem to affect your bottom line, it might be better to take them off the to-do list as well. These might include spending time on marketing channels that haven't brought in any results, or long real-time meetings that address issues that could have been dealt with via email.
6. Expand Your Reach to a Broader Market
To increase your profits, you might also do well to increase your reach. Which areas—whether demographic or geographic—can your business do better in? For example, if you're selling your products well from your city, but you haven't maximized your opportunities in the next city, perhaps it's time to expand your market and reach out there.
One example of expanding is by broadening the reach of your marketing message. Groove HQ, which makes helpdesk software for businesses, creates blog posts to reach a much broader audience than their target market. In other words, they don't just focus on reaching out to prospects, but to a more general audience. It has allowed them to get referrals, build partnerships, and get more media exposure.
When you're focusing on attracting just a specific segment of the market, you lose sight of all the other people who might possibly be interested in your product, or who might have contacts who can be potential prospects for you.
7. Eliminate Bottlenecks in Your Sales Funnel
Another way to maximize your business profits is to take a critical look at your sales funnel and see where it can be improved. List all the steps it takes for a customer to find out about your business and actually purchase something. These steps could take place online, where they find your website, browse, and buy something from your online store. An offline sales funnel might include customer walk-ins to your store, sales calls, or incoming customer calls.
Once you have all the steps listed, ask yourself and any relevant staff the following:
- In which part of the sales process do most potential customers drop off? Is it when they find out the price, get in touch with customer service, or use up a one-week trial period? Spot the leaks in your sales funnel and see what measures you can take to stop qualified leads from losing interest.
- Is there a way to simplify your funnel? The more steps a customer has to go through before a purchase, the more chances they have for dropping out of your sales funnel altogether. If you can make the transition from decision to purchase easier and more satisfying for your client, the better. As an example, food bloggers Dustin and Lacey Baier have a business running ads on their site and selling a cookbook. By simplifying their sales funnel through focusing on their email opt-in list, they were able to increase their sales by more than a multiple of ten.
The Simple Way to More Profit
The above methods show that you don't have to restructure your entire business or make drastic changes to increase your profits. While you can still make plans for long-term changes, these simple tweaks can help you get the quick results needed to keep your cash flow on track.