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Have
you ever stopped to figure out what your profit margin is on the different
services you offer? Even though it might seem obvious that your profit
equals the selling price or residual income, minus your time and direct
office costs of your staff, a more realistic view includes the cost of
making the sale. And, in many cases, the cost of making a sale may vary
from one service or product to another.
To
figure your total costs, try dividing costs into three categories.
*
Direct-selling
costs, such as the cost of a sales rep’s time and expenses
*
Indirect
costs, such as the cost of providing clerical support, printing support
materials, or equipment costs
*
General company expenses, such as taxes,
administrative costs, and interest on debt
To further refine your analysis of profits, try categorizing your products
or services according to the markets you serve. For example, an ISO who
offers various payment services may receive ongoing compensation in one
case, a flat fee in another, and may have a high margin on yet a third but
must make an investment that the others do not have. Or, if you market
nationally, try dividing your market by geographic region, to see if your
offices, or downstream market tiers, all have the same cost-to-benefit
relationship.
Once you have divided costs and services by type, create a row-and-column
chart, with types of expenses down the side and market types along the
top. Tally up the direct and indirect costs of sales to each market,
adding on the general company expenses in each category. By comparing
these totals and subtracting them from the revenue gained in each market
type, you gain an accurate picture of which market or service is most
profitable to you.
After you carry out the above analysis, you may find ways to cut costs.
For example, you might find that your phone expenses are surprisingly
high, or that you had not taken into account hidden expenses, such as the
cost of a copier or fax machine lease. Are travel costs through the roof?
Is one customer eating away at your time and profitability?
Once you know the facts, you can take whatever specific action seems
appropriate. Don’t assume that cost cutting by itself will bring the
desired results. It’s a mistake to focus strictly on reducing costs
while ignoring revenue-generating promotion and advertising. Cut the fat,
if you can find it, but don’t ignore ways to increase revenues. Both
methods will enhance your profitability.
And by all means, pay attention to any possible cost assistance, such as
lead generation, telemarketing, or service provider paid contests. The
real value is based on how much do you have to do, how much will the other
guy do, and for how long can you expect to be paid.
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1995-2000
The Green Sheet, Inc.
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