Discover how to increase profit quickly and easily by adopting a variation of Jay Abraham's three ways to grow a business model.
Marketing guru Jay Abraham is famous for many ideas and innovations but one of the most powerful is his concept of stripping down the complexities of business growth and profitability into three components:
- Increase the number of customers
- Increase the value of each transaction
- Increase the number of times an average customer buys per year
An Example of The Three Ways To Grow A Business
If sales turnover equals £840,000 per annum, the three ways to grow formula can be broken down into:
- 200 customers
- who spend on average £700 per transaction
- and buy six times per year.
200 x 700 x 6 = £840,000
Jay Abraham's three ways to grow a business model is a simple but so powerful and effective way to increase profit because it::
a) breaks the focus on increasing sales by attracting new customers.
The idea of selling more to existing customers is opened up and the success of Jay Abraham and his followers has shown that most companies do not maximise their opportunities for profit with existing customers. So this is often a great source of hidden profits. The potential is already in your business, it's just a question of whether you will take the action to capture them.
b) the model creates exponential, geometric growth.
Increasing each factor by 10% generates 33% total growth. Increasing the three drivers of growth by 20% each creates 72.8% growth. Others try to grow the hard way by focusing on increasing the number of customers. Jay Abraham students know that profit can be increased more quickly and easily by focusing attention on your existing and past customers.
Adapting The Model To Increase Profit
Usually higher turnover translates directly into higher profit but because times are tough I want to adapt Jay Abraham's model away from turnover growth to show you how you can increase profits quickly and easily.
My revised model to increase profit is:
- Increase the number of customers
- Increase the average profit of each transaction (this was sales value in Jay's model)
- Increase the number of times the customers buy on average in the year
- Reduce the overhead costs (this is the addition from Jay Abraham's model)
So the first three when multiplied together create Total Margin which becomes Profit when Overhead costs are deducted.
Increase Profit By Reducing Overhead Costs
The quickest wins and boost to profit can be to cut your overhead costs.
If your average margin is 25%, then to increase profit by £1,000 you can either increase your sales by £4,000 (to create an extra £1,000 margin) or reduce overheads directly by £1,000.
I discussed the mechanics of cost cutting in another blog - see cost cutting in your business turnaround for more information.
The essence is that to increase profits by reducing costs you need to:
- Cut any costs which exceed the value/benefit they create. Costs have a nasty habit of creeping up in good times and becoming the norm so you need to develop the habit of reviewing cost schedules and challenging whether they should be incurred at all.
- Review your other costs to make sure that you are getting as much "bank for your buck" as you should or could. This includes reviewing the profit effectiveness of employees. The roles may be necessary but you may have some people who are under-performing in their roles, incurring the costs but not giving you the benefit of higher profit. See Difficult Decisions Made Easier for details of Brian Tracy's technique called zero based thinking.
Increase Profits By Increasing Your Profit Margin
The Jay Abraham three ways to grow a business formula is simple and its implications for increasing profits quickly and easily is clear.
Focus on your existing customers and clients and implement techniques to persuade them to buy more and to buy more often. Then when your clients are receiving great benefits and an outstanding service from you, tap them for referrals to new profitable customers.
This development of the hidden profit potential in your existing customer base is the method that Jay Abraham has used to devastating success throughout his stellar career.
The problem is that Jay's techniques are deceptively simple in concept but not so easy to apply. This has caused many of his followers to struggle with turning his ideas into big increases in profit.