INCREASING THE SALES

OF YOUR

SMALL BUSINESS

By

Derek Williamson

FAIA, FFA, FIPA, CME

 


CHAPTER 1

Will it be Beneficial to Increase Sales?

Before you begin, it is important to ask yourself the following:

1.Does it make sense to increase sales?

2.Which would be more profitable: to focus efforts on increasing sales or to focus efforts on improving margins?

It’s important to start by asking whether or not it makes sense to increase sales.And if yes, by how much?Be aware that increasing sales by too much could result in a reduction of profit.How could this happen?Capacity.If you increase costs beyond your capacity, two potential problems could arise.One problem is that you could be required to invest in equipment or personnel to handle the additional capacity.This could come at a cost which is higher than the profit generated from the additional sales.Secondly, there are circumstances in which adding capacity is impossible, or could negatively affect your current customer base.In this situation, you may have to short deliver customer orders, damaging your reputation.In turn, this could cause many of your existing customers to make a permanent switch to one of your competitors.If this problem is severe enough, you could even end up with fewer sales than you had prior to the sales generation campaign.It is important to consider all the factors involved with capacity before making a decision.This includes equipment requirements, personnel requirements, and anything that could impact the amount you are able to sell.For any given business it is not uncommon to have multiple impacting factors which complicate your ability to calculate how much open capacity you have.

Another significant concern lies in the hidden costs connected with a potential increase of capacity.Will increasing sales result in different tax implications, increased warehousing/inventory costs, or an increase in other hidden costs?It is critical to know what additional capacity you can take on before incurring additional costs, as well as what the extent of those costs could be.It may make senses to add additional sales and capacity if adding capacity will be inexpensive.However, if adding capacity would be impossible or costly, increasing sales could be disastrous.It is highly advisable to create a document which shows the following: your current capacity, how much you currently are using, excess sales capacity available before it becomes essential to increase capacity, the fixed costs of additional capacity, the annual costs of additional capacity (including all hidden and explicit expenses), and how much sales room this additional capacity will allow for.This will ensure you have a clear understanding of how much you can take on without jeopardizing the financial stability of your business.Take a look at the sample below.

Current Sales Capacity

Current Sales

Available Sales Capacity

Additional Capacity Fixed Onetime Costs (Hidden & Explicit)

Additional Capacity Annual Cost (Hidden & Explicit)

Additional Sales Capacity Available with Investment

Sales

£300,000

£100,000

£200,000

N/A

N/A

£750,000

Contribution/Cost

£150,000

£50,000

£100,000

£100,000

£150,000

£375,000

In the above example, you have £200,000 in sales capacity before extra capacity is required.If you think you can realistically increase sales by £300,000 to a total of £400,000, it would not make sense to increase capacity.Doing this would only yield an additional £100,000 in sales above your currently available £300,000. This extra £100,000 in sales would result in an additional £50,000 in contribution, while the extra capacity would cost you £150,000 per year plus an initial £100,000 investment.On the other hand, if you think you could increase sales by £600,000 to a total of £700,000, by increasing capacity you would be making an extra £400,000 in sales above your current capacity.This £400,000 in sales would translate into £200,000 in contribution, coming at a cost of an additional £150,000 in annual expenses for a net additional profit of £50,000 a year.Furthermore, you would have the initial investment for £100,000.This would mean you would payback your £100,000 investment in 2 years.If a 2 year payback in acceptable for your business, which I expect it would be, then increasing capacity would be the right choice.


Another way to show this would be in a graph such as this.As you can see in this scenario, it only makes sense to increase capacity if you think you can increase sales by at least £300,000 to a total of £600,000 or more.At that point, you would be making enough contribution from the additional yearly costs to cover the extra £150,000 per year expenditure.

The second question you need to consider is whether it would be more beneficial to focus your efforts on increasing sales or to keep your sales constant while focussing your efforts on improving the margins of your existing sales or reducing fixed costs.If you can find ways to improve your margins by up-selling your customers or reducing the costs of the goods or services you sell – focussing on margins may be a better use of your time.Similarly, if you have large fixed costs that could be easily trimmed, focussing your efforts on reducing fixed costs may be the best use of your time.Look at which option is the bigger opportunity in net profit and the estimated resources (time, money, etc.,) required to achieve the available increase in profit,If you can get a better return from any of these options, pursue these opportunities first before working on increasing sales.

If, after answering these two questions, you have realised sales is not your greatest opportunity to increase profits –STOP now and focus your energies on other goals.Make the wise choice and wait until conditions are better for increasing sales.On the other hand, if you found confidence in the answers to both of the two questions at the start of this chapter, and believe that increasing sales is the smartest choice for your business - it is time to develop a plan.The remainder of this guide will help you to do just that.

Why Might It Not Make Sense to Increase Sales

  1. Limited capacity and adding capacity is not possible.
  1. Limited capacity and problems arise if added capacity.

(a)Increasing capacity would cost more than additional profit.

(b)Increasing capacity would negatively affect current customers.

  1. Efforts in other areas would result in better return on resources.

(a)Reduce costs.

(b)Improve margins.

CHAPTER 2

What is the Best Way to Increase Sales

Next it is vital to consider how you are going to increase sales.There are two very different options: to increase sales with your existing customers or to increase sales by generating new customers.Depending on which you feel is the most efficient and profitable way to increase sales, the option you choose will greatly affect the sales and the marketing tactics you should implement.

Let’s take a look at option number one – increasing sales with your existing customers.There are multiple ways this can be done.You can sell existing customers more of the same product they currently buy, you can sell them a new product you previously did not carry or you can sell them a product that you sell to other customers but that they currently don’t buy.

Similarly, there are multiple ways to increase sales by generating new customers.First, you could attempt to capture a greater market share within your current market.Second, you could sell a new product that will attract new customers you currently can’t or don’t service.Third, you could enter a new segment or geographic area you did not service before but with your current product and service offering. And lastly, you could create a new market for one of your existing products by promoting a new way one of your products or services can be used (ie., selling baking soda as a fridge deodorizer rather than for baking).

How to Increase Sales

Sales Opportunity

Gross

Margin

Fixed Costs

Expected

Profits

Chance of

Success

Expected

Value

Existing Customers – Sell a new product

£100,000

35%

£10,000

£25,000

80%

£20,000

Existing Customers – sell more of an existing product

£200,000

40%

£30,000

£50,000

5%

£2,500

Existing Customers – sell an existing product to current customers who do not buy it

£50,000

40%

£10,000

£10,000

25%

£2,500

New Customers ­– attempt to capture greater market share within current market

£50,000

40%

£75,000

£25,000

80%

£20,000

New Customers – Sell a new product targeted at new customers

£50,00

40%

£30,000

£10,000

60%

£6,000

New Customers – Enter a new segment or geographic area

£75,000

35%

£25,000

£1,250

80%

£1,100

New Customers – Invent a new usage for one of your current products.

£400,000

50%

£200,000

£0

50%

£0

Take a look at each option and determine which exactly you believe will be the most efficient and profitable way to increase sales. For each of the different options, list how much you think you can increase sales, what the profit margins are for each option, any related costs, how much profit each option is expected to deliver, and the chances that you will be successful for each option.For the chance of success percentage, use you best estimate from 0% to 100%.See the example overleaf:

In the above example, it looks as though the first option is the smartest.This is because although it is not as large an opportunity as the second option, it is much more likely to succeed.By using the chance of success to calculate the expected payout of the first option, the expected payout is £25,000 x 80% = £20,000. However, using the same calculation for option two yields the result of only £2,500.

The cost of acquiring a new customer is usually very high.In most cases selling more to existing customers will be the more efficient and profitable method to increase sales.However, this is not always the case.You may be blessed with low customer acquisition costs, get lucky with a highly profitable opportunity with the new customers, be able to easily capture additional market share in your current market or be working with someone who specialises in generating new customers.If any of these scenarios are true, then generating new customers in order to increase sales might be the better option.

CHAPTER 3

Determine Who is the Most Interested in Buying from You

Now you have established the way in which you are going to increase sales.Your next major decision is which products and/or services you will need to promote as part of your plan.Once you have determined the product/service you will focus your efforts behind, you will need to get a strong understanding of the product and what market will be most interested in buying frorm you.Take a hard look at the product you want to promote and ask yourself these questions.

What need does this product/service fill?How will it benefit the customer?What problems will it solve?

What type of customers would be interested in it?

Once you have determined the role of your product/services, it is time to classify which types of customers have a common need for it.Can you pinpoint any one demographic, geographic or psycho-graphic trait which would increase the chances of need for your product/services?Remember to also consider other traits such as hobbies or interests.Be creative and think outside the box as to what commonalities could make people more likely to buy your product/service.Create multiple groups of similar people that would be interested in buying your product.Write a profile of the ideal situation within each group – a person or business with a problem that your product/service fixed perfectly.This will help you understand who is most likely to be interested in buying from you.Once you have this information, you can determine which of these groups to target and how best connect with people who desperately want what you are selling.You need them and they need you.All you have to do is find each other.

Questions to Determine Who is Interested in Buying What You are Selling

1.What problem does your product/service solve?

2.How will solving this problem benefit the customer?

3.What type of customer would be interested in having this problem solved and receiving the corresponding benefits from having the problems solved?

4.What are the similar or highly probable characteristics of these customers?

5.What similar characteristics can you use to create groups of people for targeting?

CHAPTER 4

Determine Who is the Most Valuable Customer

After determining which types of customers will be most interested in buying, your next step is to decide which of them is the most valuable.This involves analysing which customers will deliver the most long-term profit.This can be done by taking the list of target groups from the previous chapter, and taking the following into consideration: annual synergies, efficiencies, costs, strategic implications, and expected life time duration of the customer.By servicing a specific target a particular target you might be able to gain additional efficiencies or see how to take on additional costs.A great example of this is where a £25,000 certification or organisation membership is required to sell to a particular target group.Any annual mandatory operating costs that are unique to only that target group should be including your analysis to ensure a proper comparison.

While appointing the most valuable customer, one must also factor in information related to the probability of securing new customers.This ensures you do not spend too much time chasing a seemingly large opportunity when it actually has little chance of success.Instead, you could be working on numerous smaller opportunities that would have a much higher chance of generating sales.As a result, you could secure many small sales easily that in total would combine to a significant amount and overall better results.

For example, by looking at the Expected Value in the table below, you can see that Target #4 and Target #5 are the target markets that should be considered.Despite the large size of Target #2, it makes sense to select either #4 or #5 given the higher probability of success.Beyond the data presented in the table, there are other factors to consider that are hard to quantify.Ask yourself: are there any other strategic benefits of obtaining customers in Target #4 as compared to Target #5?For example will either form partnerships that will give you access to assets such as better suppliers, technology or valuable information?

Target Group

Annual Synergies & Efficiencies

(£)

Annual Additional Costs

(£)

Annual Profit from Sales

Total Annual Profit

(£)

Expected Customer Lifetime

Total Customer Lifetime

(£)

Chance of Success

Expected Value

(£)

#1

10,000

0

10,000

20,000

5yrs

100,000

80%

80,000

#2

200,000

0

30,000

230,000

3yrs

690,000

5%

34,500

#3

5,000

0

30,000

35,000

1yrs

35,000

50%

17,500

#4

100,000

25,000

30,000

105,000

5yrs

525,000

25%

131,250

#5

0

0

30,000

30,000

5yrs

150,000

95%

142,500

However, it is possible that the chance of success is not easily defined by a single outcome.In this case, a more complex expected value calculation can be created.The example below shows how to calculate the expected value for Target Group #1 when there are three potential outcomes (or when you can see a scale of possible outcomes).The new expected value is £130,000 as noted in the example below.This process would then be applied to any target group that has foreseeable multiple outcomes.

The same approach can be used to compare pessimistic, realistic and optimistic scenarios if the target groups have differing ranges of risk and reward.Again, the expected value plus any strategic benefit should be considered in order to determine which customer would be best to pursue.

Customer Target Outcomes

Annual Synergies & Efficiencies

Annual Profit from Sales

Expected Customer Lifetime

Total Lifetime Profit

Chance of Occurrence

Expected Value

(£)

Target Group #1 – Outcome #1

£5,000

£10,000

5 years

£75,000

50%

37,500

Target Group #1 – Outcome #2

£10,000

£30,000

5 years

£200,000

35%

70,000

Target Group #1 – Outcome #3

£20,000

£10,000

5 years

£150,000

15%

22,500

Total Expected Value

130,000

For further information about Goddards Accountants, please call us at our offices:

Brixton Office
		

		
c/o Technoestates
		
102 Acre Lane
		
Brixton
		
London
		
SW2 5QN
		
High Wycombe Office
		
		
c/o Franklin James
		
Axis 40, Oxford Road,
		
Stokenchurch,
		
High Wycombe
		
HP14 3SX
		
Croydon Office
		
		
c/o Technoestates
		
109 Church Street
		
Croydon
		
Surrey
		
CR0 1RN
		

		

		
Head Office
		
		
Spirit House
		
8 High Street
		
West Molesey
		
Surrey
		
KT8 2NA
		

		

Tel: 020 8941 2187
Increasing the Sales of Your Small Business.pdf