The first key methodology to address, or look at, is gross margin.
When I did an MBA, you are given case study after case study after case study after case study, and you learn very quickly to get into the numbers, to look at the management accounts and drill down to where the profit is in the organisation – but particularly within products and services where the gross profit is.
Now in most small businesses, you are looking at 7%-8% of people who will actually use management accounts. We are talking here about businesses maybe 5 million, or below.
Now without that information, without that true knowledge of what your most profitable products and services are, businesses then get run on gut feel. When we start working with organisations, we utilise that gut feel. Over time we work with them to try and understand, and get management accounts in place, so they truly understand where the gross profit is in the organisation.
If you deliver the power of internet marketing, of digital traffic, to a website that converts well but you are targeting the margin of your business then, strangely, you grow very quickly, and you grow profitably.
So, a good case study is an organisation that we work with that does industrial flooring. When we started with them they were working in vinyl flooring, not really knowing which products were the most successful, but they went away, analysed their figures, spoke to their accountant and then came back to us and realised epoxy resin was far more profitable for them.
Our online strategy then became, driving traffic relating to epoxy resin to the website which is far more biased towards epoxy resin, communicating on a regular basis via email and as a result the return on gross margin increased from 3:1 (in Year 1) to 10:1 (in Year 2) to 25:1 (in Year 3). Obviously, that means the business is growing very profitably over that period of time, enabling them to do all sorts of things in terms of investing in other areas of the business – e.g. new plan, new machinery, new factory – and just growing as an organisation.
The three most important things for you to do as far as gross margin is concerned is one, sit down as a business and look to understand where you think you are most profitable. Two, have a chat with your account and get your accountant in and, finally, get some management accounts together, so that you can back your judgement with facts and figures – you might get one or two surprises.
Check out the second video – Video 2
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