Do You Know What Drives Your Profit? (There Are 4 Drivers)



For profits, entrepreneurs must learn how to manage their financials and performance, which are difficult tasks. Savvy business owners know who their ideal clients or customers are.

Entrepreneurs realize financial benefits when their revenue from business exceeds their expenses and taxes.

This results in a much easier task – deciding whether to save, spend or invest the profit back into the business.

Until employees and customers actually walk a mile in an entrepreneur’s shoes, they often think a small business owner is wealthy.

That may or may not be true.

In recent years, the odds are that many small business owners are still struggling.

Smart, hardworking business owners enhance their chances for success.

They accomplish this by completely understanding the critical factors that drive profits and they tirelessly focus on those profit-drivers.

Savvy business owners know who their ideal clients or customers are.

Profit drivers

The four basic drivers of profit:

  1. Price
  2. Variable costs (variable costs change as a result of revenue from the cost of sales)
  3. Fixed costs (also known as overhead)
  4. Sales

Which of the profit drivers have the most impact on an entrepreneur’s success? Price. That’s because increases in price immediately add to any profit margin.

Many entrepreneurs make the mistake of focusing on sales volume without regard to price. Especially, in a sour economy, business owners are focused on selling to alleviate ageing issues.

The dilemma, however, is that sales increases are tied to increases in variable costs, which lead to less profit.

Conversely, decreases in variable costs increase profit margins, but total revenue will not increase.

Many business owners fail to realize that cutting fixed costs do not affect revenue, which means it has the least effect on profits.

Entrepreneur mistakes

The three biggest profit-mistakes of entrepreneurs:

  1. Business owners are so focused on developing revenue from prospective customers, they fail to concentrate on their existing customer base.
  2. They fail to build their brand image so they miss opportunities to increase prices.
  3. When they cut good marketing and lay off employees to cut costs, most often they’re cutting their investments in their business muscle — not fat.

To elaborate on mistake No.2 — missing brand-building opportunities to increase prices — successful entrepreneurs determine how much they can hike prices without losing profit.

Many entrepreneurs make the mistake of focusing on sales volume without regard to price.

True, you will most likely lose the 18 percent of customers who only buy products at the cheapest price. But depending on the amount of a price increase, you can still make a better profit.

Price-sensitive customers who do not appreciate value, most-frequently make the most-undesirable customers. They’re high maintenance, and demand the most service. They complain the most and most-readily return products.

The moral: Build your brand to maximize prices and target the best customers. That’s what leads to long-term profits – and success.

From the Coach’s Corner, here are more relevant strategies:

8 Simple Strategies to Give You Pricing Power –– If you’re struggling with pricing strategies, you’re not alone. Many big companies have struggled, too. By way of explanation, according to a study, almost 90 percent of executives in a global survey forecasted their continued growth. However, they anticipated implementing just minimal price increases as they continue to slash costs, or at least closely monitor expenses, for positive cash flow.

For Stronger Profits, Avoid 11 Typical Pricing Mistakes — In general, how can you manage the sweet spot – between your price-optimization and costs? Dennis Brown of the consulting firm, Atenga (www.atenga.com), says many companies make 11 pricing mistakes: Companies base their prices on their costs, not their customers’ perceptions of value…

Quick Checklist for Profits You Can Implement Today — Here is a top-10 checklist for profits: 1. Review and fine-tune your business plan. Be sure to discern your competitive landscape and benchmark your main competitors. 2. Bring on the A team – both in staff and advisors. Recruitment and training will remain important, and seek the best mentors and professionals for inspiration to help you sustain growth…

Why Your Customer-Loyalty Program Might Not Be Profitable — Researchers are warning businesses that their customer-loyalty programs, which are designed to increase repeat business, may be causing more harm than good. Even though “customer prioritization” is widely used by companies, the researchers warn they’re a double-edged sword and represent the dark side of customer loyalty programs. As a result, businesspeople get stressed out after implementing customer-loyalty programs because they lose profits when they unknowingly and disproportionately increase service costs.

For Profits, Manage Your Growth at the Right Pace — Entrepreneurs frequently try to rush their business growth. Certainly, growth is great but if you scale too fast, you’re looking for trouble. The key is to prepare. Note: You aren’t ready to grow if you haven’t developed a business model that will enable you to attract customers – at less cost – than what they pay you. How do you get there? Success comes after you develop habits that will help you build your brand, develop sound business operations and successfully deal with people.

“I don’t want to do business with those who don’t make a profit, because they can’t give the best service.”

-Richard Bach


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Author Terry Corbell has written innumerable online business-enhancement articles, and is a business-performance consultant and profit professional. Click here to see his management services. For a complimentary chat about your business situation or to schedule him as a speaker, consultant or author, please contact Terry.






Seattle business consultant Terry Corbell provides high-performance management services and strategies.