How to Grow Profits Without Increasing Capacity
There are times when growing revenue in the double digits is not necessarily desirable, so focus instead on increasing profits.
A few days ago I was talking with my brother. He runs our family’s HVAC contracting business. Their core business is commercial HVAC maintenance but their special talent (for over 40 years now) is troubleshooting tricky problems. My brother would really like to grow the core business, but finding good mechanics; who can troubleshoot these tricky problems; is EXTREMELY hard.
He is not alone. As the labor market tightens and companies find it harder to source good people they can be reluctant to invest in building more business and in growing sales. They are concerned about finding enough great people to continue to provide the quality standards they are known for. And who can blame them? Many of us will have experienced dealing with a business undergoing a growth spurt - where capacity can’t keep up with demand – it’s not a pleasant experience for the customer, and can be very damaging for the company if not managed well.
It’s a concern shared by many “lifestyle” businesses too. These businesses are often set up with the aim of sustaining a particular level of income to enjoy a particular lifestyle. They typically have limited scalability and potential for growth - because such growth would destroy the lifestyle for which their owner-managers set them up!
So, what do you do? Stop growing? Venture into new, uncharted areas? Maybe, but for many businesses this is just not a viable option.
But what if you could scale without increasing capacity? Now there is a concept!
Ok, how? Well, Vilfredo Pareto to the Rescue! Pareto was an Italian engineer, sociologist, economist, political scientist and philosopher! He’s best known for the Pareto principle (which is now better known as the 80/20 rule). It states that, for most events, 80% of the effects come from 20% of the causes.
When applied to your business, it means 80% of your profit comes from just 20% of your customers. Which means that roughly 80% of your customers suck!
Ok, that’s a little tongue in cheek but it makes the point. And it’s proven to be remarkably true for most businesses. If you take a closer look at your customers you will likely find there’s a lot who consume more of your resources than they justify.
Check out this case study. (Scroll down to the “bad customer 50 mm B2B manufacture” example).
My friend Leo Sharkey at Shark Analytics (great name, eh?) helped this company drill down and discover that they had 3 customers who requested 1,100 quotes - of which they only won 14. For this industry an experienced engineer was required to put these quotes together. It took one full year of that engineer’s time - just quoting jobs! And the jobs they won yielded a total of just $70,000 in revenue.
If finding quality engineering talent is a problem, then you don’t want to have that engineer spend an entire year quoting deals that lose you money. You can be pretty sure there is a better way!
This might seem like an extreme example but you’d be surprised how much time you are spending on customers who don’t add any value to your business at all.
So, a change of focus is required to scale without increasing capacity – here are your two steps:
- Find someone like Leo, either internally or hire a contractor, to dig into the data and find out what is really happening at your business. Identify those customers that cost more than they are worth. If they are costing you money now, give them the boot straight away! In the nicest possible way of course. If they are merely inferior to your other customers, hang on to them for now until you have implemented step 2.
- Identify your really great customers and dig into what makes them great. Create a “persona” around your ideal customer and focus your sales and marketing efforts on landing more of these. As you bring in more and your capacity gets stressed, you can start to weed out the bottom 80% - starting at the bottom and working your way up.
It’s surprising, but you will likely find that you can DECREASE revenue but INCREASE profits at the same time. Side benefits include happier employees, happier customers, reduced stress and more time to spend indulging in the lifestyle you’re trying to create. Good luck!
If you would like to talk with Leo you can find him here.
If you would like to learn more about ways to target better customers you can book a time to talk with me here.