There are only three ways we can increase our profits. We can cut our expenses, we can increase our margins or we can increase our sales. I defy you to find another way.
What does big business do first? They cut expenses—every time. It never ceases to amaze me that they cut staff to cut expenses and then wonder why they lose customers due to bad service. But what can we, as small-business people, do more effectively? In my office we don’t keep paper. We scan documents and keep PDF files. I can make notes on my digital recorder anywhere in the world and email the voice file back to the office for typing and action.
What can you do more effectively? What technology can you utilize to streamline your business? Are you using the Internet effectively? Have you created a process out of everything you do? Or are you still trying to reinvent the wheel?
Now let’s look at margins. How easy is it for us to increase margins? It’s easier than we think. Certainly we can’t control commissions, but we can, and should, be charging our clients fees for our services. There are three reasons why.
The first is because we are professionals. We are required to study, to understand tax implications, to be familiar with legislative changes, to stay on top of product changes and so on. How many other professionals do you know that don’t charge a fee for their knowledge?
The second reason is that it gives us the revenue to give even more value to our customers, and when we do that we differentiate ourselves even further.
The third reason why we should charge fees is that as consumerism gathers pace, there will be a greater push for full disclosure of commissions or even to sell products with no commission. Some companies are reducing commissions. Let’s be prepared.
The final way to increase profits is to increase sales. That’s the easy one.
Very early in my time in this industry I learned what I now call the ultimate sales formula: Contacts x “Yes” Factor x Average Sale
In other words, to increase your sales you need to make more contacts, convince more people to say yes to you or increase your average sale. Preferably all three! The beauty of this formula is the leverage—it compounds. If you work on all three, your sales will soar.
SMART BUSINESSPEOPLE BENCHMARK EVERY ASPECT OF THEIR BUSINESS.
Think about it this way. Imagine you currently see 10 people a week—two a day—and you make two sales per week that are worth $1,000 each. Your income for the week is $2,000. Now let’s say you increase your calls to three a day, just a small increase, and you make three sales a week. Three out of 15 calls is the same ratio as two out of 10, but you increase your average sale to $1,500 in earnings. Now you’ve earned $4,500. If you had improved your closing ratio, your “yes” factor, to three out of 10, the result would have been $6,750.
This is a wonderful formula because everything is measurable. You can benchmark every part of it. Smart businesspeople benchmark every aspect of their business.
At the very least you should know:
- The size of your average sale
- How many sales you made last year
- The profile for your “ideal” client
- How many sales you close on the first interview
- How many you close on the second, the third,
the fourth and so on
- Your best source for leads
- Your sales, profit and income goals for the
balance of the year
- Your sales, profit and income goals for next
- Who your best, most profitable customers are
- Where they came from
- How much they spent with you
- What your most profitable products are
- Your closing ratios
You may be thinking, “But I don’t have time to see any more people” or “I don’t want to work any harder.” Well, you can still work the formula. The secret is to see more of the right people and to get them to buy bigger amounts. That means targeting more affluent customers and building better relationships with them. I deal only with business owners whose companies are worth between $2 million and $10 million. Less than that, they can’t afford my fees; more than that, there is too much competition from the major accounting firms, and the decision makers are too hard to get to.
It also means recognizing that you are not a public service. You don’t have to deal with everybody. You can afford to be selective. Good businesses decide who they don’t want to deal with by having a clearly identified target market.
This is an edited excerpt of a longer speech given at the 2004 Million Dollar Round Table annual meeting. Printed with permission from MDRT. All rights reserved.
Michael J. Harrison is a 19-year MDRT member with five Court of the Table and nine Top of the Table qualifications. After building one of Australia’s most successful life agencies, he ran Zurich’s Australian life insurance business, growing it by more than 700 percent in four years.