What’s Your Gross Margin?
One of the things that the current crisis is testing to its limits is the underlying business model. Too many businesses are not structured financially to be sustainable. If your Gross Profit is not high enough to cover your overheads your business becomes bankrupt. Do you know what your gross profit is? If you do not have a clear understanding of your breakeven then you do not know where your business is and whether it is truly viable.
It’s a good time to ask, “Am I offering what my customers really want?” and “Is my pricing viable for the sustainability of my business?”
I’m sure you can remember more than one potential entrepreneur on Dragon’s Den that was seriously deluded about potential demand for their product. There have been amazing ideas that the inventor hasn’t been able to articulate the value. All because they didn’t know or understand the numbers easily.
So, could you be offering something different and more attractive to your customers?
Would that attract a better price?
Remember “service” is what you are offering, and “value” is what the customer is getting. Knowing and understanding the value that is being delivered means you can price accordingly. Too many businesses price on the basis of cost-plus x%. They are leaving money on the table because they don’t understand the value the customer is getting.
A good place to start is with some basic viability questions and actions:
- Research the market – ask your customers or potential customer
- Get honest feedback – and listen to the good and the bad
- Plan your marketing strategy
- Assess the overall costs of the venture
If your new business offering and model starts to look viable, then pass it through a next level test:
- ·What’s your unique service / value proposition? – What makes you stand out? (BIG CLUE – It is NOT customer service!)
- What funds are needed?
- Who are your ideal customers? – knowing this will allow you to focus your marketing
- What else is in the market?
- Who are your competitors?
- Can I generate positive cash flows that support the overall costs of the business?
Then model your numbers. It doesn’t have to be a massive complex spreadsheet. Keep it simple. Some critical numbers you need to have a basic understanding of include:
- Sales (value and volumes)
- Profit margin
- Overheads
- Staff costs
Then look at:
- Cost of customer acquisition
- Marketing Return on Investment (ROI)
- Revenue per employee
Remember: “Turnover is vanity and Profit is Sanity!”
