Measure marketing resultsThe method that produces the highest profit for the dollar spent wins. That's a pretty easy concept. But how do you actually put it into practice? Let's say you sell a pool-cleaning service for $300. You place an ad for $900 in a local monthly magazine. Sell to three customers and you break even, right? Wrong. What we're talking about here is return on investment (ROI). If your hard costs to deliver the service (staff, supplies, etc.) total $100, you're only making $200 per customer (67 percent on each sale). So rock bottom, you need to make $1,343 per ad ($900/67 percent)--or about 4.5 customers ($1,343/4.5 customers). But that only gets you to break-even. It doesn't help cover any of your overhead costs (vehicles, rent, loan payments, taxes, etc.), and it doesn't leave you any profit. If that one ad had to cover all your fixed expenses (let's say they total $3,000 a month) and leave you with a 10 percent net profit, you'd need $5,263 in sales or 17 to 18 customers from that one ad.
[Fixed Expenses ($3,000) + Ad Cost ($900) / [Gross Profit Margin (67%) - Desired Net Profit Margin (10%)]
That's: $3,900 / .57 = $6,842 or about 23 customers ($6,842 / $300 each) or a 7.6 times return on your ad investment ($6,842 / $900) Any less, and you're contributing to the magazine's profit, but not your own.
Establish a preventative maintenance program for buildings and equipmentSudden stoppages due to broken equipment can be very costly. Be sure to have unique spare parts on hand so that minor problems don't become major ones. Develop a network of owners of similar equipment that you can call on for advice or loaner parts. Keep a database of where to buy essential parts and keep it up to date.
Compare your expense ratio and other ratios against others in your industrySuppose you found out that your chief competitor makes 10 percent more on each sale than you do. On $200,000 in revenue, that's $20,000 they're taking home--or reinvesting in the business--that you're not.
I'm not talking about corporate espionage here; I'm talking about financial benchmarking. It's perfectly legal, and in most cases the data you need is available at no charge. A summary of the best sources of data is available at FindingMoneyAdvice.com .
If you learn that your gross profit margin is lower than average, you'll want to figure out why. Are your prices too low? Are your costs too high? What do they know that you don't?
Ask employees for cost-saving ideasIf you really want to encourage participation, offer a percentage of the first-year savings to the creators of the ideas that are implemented. According to Jim Leddy, public information officer for Sonoma county in California, they saved $7 million using ideas submitted by their employees. Some of the suggestions listed on their website include:
- Stop food and beverage catering for management meetings.
- Stop providing bottled water; variations: drink tap, tap with faucet filter (cost split with employees).
- Create a hotline to confidentially report administrative waste, fraud and abuse.
- Reduce janitorial services to two days per week as opposed to three. While there was no financial incentive in last year's program, prior programs awarded $5,000 for the best idea.