Press the profit button – Make the most of this season
We all need a good season this year, but we don’t know what the weather will bring. Despite the economy and the weather, all of us can improve our profit position by making one straightforward move.
A long time ago I had the inestimable privilege of working in one of Australia’s iconic companies, reporting right up to a director who was something of a legend. His big new house was on a double block in a prestigious Melbourne Bayside suburb - all bought on his personal overdraft. Charlie was the kind of guy who, when he spoke, it always paid to listen!
At one event in the boss’s office, Charlie made a remark that I missed. When I asked what he had said, he replied “I just said, you can’t bank percents.” It seemed a pointless remark, but since Charlie wasn’t given to idle comments, I parked it in memory - then forgot about it.
In 2008, all of our pool shop clients reported terrible results. Sales all undershot budget and trading profit crashed too. Remarkably, all of these pool shops reported very strong gross margins. Then Charlie’s comment came back right up out of the mist. “You can’t bank percents!”
All of these pool shops had been operating under the great furphy so beloved in small business - “Maintain the Margin”. And so it worked out. They had maintained their high margins, which of course are measured in percentages, but had lost sales and badly hurt their gross profit in the process. They couldn’t bank their high margin percentages - instead they had to bank their much-reduced gross profit dollars.
Now it’s not too good for a consultant to have so many clients all do so badly, and I was frustrated and furious. We had advised those stores to follow the successful advice we had previously given a Queensland pool shop - maximise sales, and forget the price.
By maximising sales, that Queensland store naturally saw its gross margin fall - from 55% to 52%. The real gold was that they banked an extra $50,000 in gross profit.
This time, our pool industry clients had all ignored our advice, and exercised a client’s sovereign right to stuff up their own business.
Let’s put some numbers on that. One pool business had budgeted for a profit of $248,000, but actually achieved $48,000. Amazingly, that client was really happy, since that was more than the previous year result of $38,000! Forget the $200,000 that leaked away.
Isn’t that a familiar story? Forget about what the business could be. Just compare it with what it has been!
In the years since, that client has come to appreciate the potential of his business. Now he is reporting trading profits around $300,000 - more than six times the previous result. The difference is realising that gross profit dollars only come from making dollar sales, not from hanging on to high gross margin percentages.
There is a presentation I sometimes make - “Pricing is your most powerful business development tool”. Obviously, this subject is more complex than simply dropping prices in pursuit of higher volumes. That approach simply doesn’t work. Instead, pricing is actually a very complex process, and if it’s wrong, profit suffers badly.
So, how do you maximize sales to maximise profit, and keep a strong gross margin? Right at the beginning, I referred to “making one straightforward move”. I said it was straightforward. I didn’t say it was easy!
The straightforward part is to study buyer behaviour. That usually isn’t easy for people who have a technical background, but it is absolutely vital. However, it is also well documented, so there are lots of resources available to you to come to grips with the concepts.
The other ‘not easy’ part is understanding your cost structure, and how your cost/volume ratio works. Your bank’s “Small Business Manager” can probably help, and of course there are many advisors who will willingly help you in these areas. We use a range of sophisticated tools to help clients work through these issues.
As the mass merchants, discount department stores, and internet discounters grow ever stronger, understanding and applying the disciplines of competitive pricing and the science of buyer behaviour become even more important for you.
Coming to grips with these issues will take some time. In the meanwhile take this one straightforward step: Never let anyone leave the shop empty handed, if price is the only issue!
You’ll see the profit benefit, and soon understand why this approach presses your profit button to make this one a good season for you.
Who is Max Williams?
Max Williams is Principal Consultant of McNicol Williams Management and Marketing Services, management consultants to Small and Medium Businesses. The practice has been operating since 1985, and has been operating in the Swimming Pool Industry for 15 years. In that time, Max has seen more than a hundred pool shops and related businesses.
Today the company operates “My Red Zebra” - a management program to improve the profit and market standing of businesses like pool shops. McNicol Williams also operates “My Local Pool Shop” an on-line sales portal. My Local Pool Shop enables all pool shop operators to grow and strengthen their pool shops by engaging their customers on-line, even in the busiest peak of the season.
Max has a background in general management and strategic marketing, and is professionally qualified in both engineering and business management.
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