The profit curve of a firm is the total revenue (TR) curve less the total cost (TC) curve. these curves display the fluctuations of cost or revenue (Vertical Axis) at a given levels of output (increasing along Horizontal Axis).
Along the section of the curve where Total Cost is below Total Revenue, the point at which the 1st derivative of the Total Cost (TC) Curve is parallel (B) with the Total Revenue curve represents the level of output where Profit is maximized (A).
So now that you know this, what are the variables that you, the Business Owner, can address that impact “The Profit Curve”?
There are Six areas of your Business that you can address by defining Strategies, implementing Actions to increase Profits. Over the next few weeks, we will look in details to all six.
As your ultimate goal in your Business is to increase profits let’s look at the Six areas of your Business to address for profits are:
- Personal Profitability
- People Profitability
- Customer Profitability
- Sales / Marketing Profitability
- Product / Service Profitability
- Market Profitability
Some customers are more profitable than others. Some may actually be costing you money. Can you identify your most profitable customers? Do you know any who are unprofitable? There is not necessarily any connection between the size of a customer or the volume of business they produce and their profitability.
There are several questions you should ask as you examine your customer profitability. How often does each customer purchase from you? What is the average size of each purchase? What is the profit margin of the product(s)purchased? How much time is spent in providing customer service
after the sale? What is the “product returns” record of each customer? And so on.
As in so many other areas, you might find that Pareto’s Law applies twenty percent of your customers may account for eighty percent of your profits. The question becomes, what do you do with your less profitable customers?
Many companies regularly “fire” the bottom ten percent of their customers. They stop doing business with those who generate the least revenues or yield the lowest return on their purchases, choosing to concentrate on their more profitable customers and attracting more like them. At the very least, be diligent in rooting out those customers who actually cost you money— regardless of the revenues they generate. You cannot afford to carry this unprofitable load.
As you continue to grow your business by driving sales, remember that the critical measure of success in any business is profits. Develop the habit of regularly examining the profitability of your Customer Profitability.
For more information on HOW you can contact one of our Business Coaches at: 1.610.768.7774.