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
Sales / Marketing Profitability:
Do you know the return on your sales and marketing expenditures? It is not unusual for companies to spend twenty-five to thirty-five percent of their revenues on sales and marketing, yet often they do not know the actual return on these initiatives.
One of our clients, a family-owned company, was determined to increase their revenue by fifty percent within one year. A marketing consultant convinced our client to mount an aggressive and costly direct mail campaign. Sure enough, within eleven months their revenues were up by an
impressive fifty-six percent. Unfortunately, their year-end financial statements showed the lowest profit margin in over ten years. They had surpassed their sales goals, but the cost of acquiring this new business exceeded the profits generated by these additional sales. The return on their direct mail campaign was negative and they immediately abandoned it.
Before adopting a new marketing initiative, determine how you will measure not only its impact on sales but on profits as well. What is an acceptable rate of return on this marketing expense? What is an optimal return? How will you measure the return? Do not wait until the marketing effort has been completed. Establish a monitoring system whereby you can gauge the
efficacy of the program throughout.
Examine your existing sales and marketing expenses. Do you know the return on these dollars? If not, find out! Increasing sales is a wonderful goal but not at the expense of the bottom line.
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 Sales / Marketing Profitability.
For more information on HOW you can contact one of our Business Coaches at: 1.610.768.7774.