One of the most helpful methods I suggest for determining profit margins and managing revenues is an A, B, C, and D approach. This is a type of evaluation that divides your customer base up into different segments based on the percentage of sales they are responsible for, with the customers who drive the highest percentage of sales designated the A customers, the next percentage the B customers and so on.
In using this method, you can get a clearer idea of exactly which customers are buying what, who is coming back for more and where your greatest profit margins are. Once you determine that the A’s are responsible for 65% of your sales and the B’s for 20% then you can begin to target your marketing in order to draw in more of these particular customers in order to increase your profits.
Not only can this give you a better idea of sales percentages, it can also help you to clarify other potential determining factors like the location of stores, the number of employees needed to service them and the specific types of products they are interested in buying. Again, all of this can help you to then focus your marketing and sales approach in an effort to maximize profits.
Of course, it’s not all about catering to the A’s and B’s. It’s equally important to identify the C’s and D’s, those customers who make up the lowest percentage of your overall sales, so that you can figure out where your shortcomings are. You’re not just identifying them so that you can cut them off; that’s hardly good business sense. Any sale is better than no sale, but if you can use this data to increase sales, all the better.
By looking at all of these numbers, you can determine your target demographic by seeing what the A’s and B’s have in common, that is making them come back for more. Now you have a focus group to aim your sales and marketing approach toward. This is extremely important as any marketing plan is only as good as its components and one of the most important is knowing who your audience is.
At the same time, you can take those C’s and D’s and run a second calculation that shows just how much it’s costing you to support these customers who make up the smallest amount of your profits. While you don’t want to turn your back on them necessarily, you may want to adjust your budget so that you aren’t spending as much in areas where it’s likely to make little difference.
Having a successful business is all about managing your profit margins and now you can see how dividing up your customer base into alphabetical columns can help to make the process easier. But what exactly does this mean for your business in the long run? It could mean the difference between turning a healthy profit and going belly up.
If all of this financial wheeling and dealing makes you feel as if you’re in over your head, you can consult a business coach to help you get your ducks in a row and start making sense of your numbers. Before you know it, those A, B, Cs and Ds could be spelling increased profits for your business.
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Awhimai is a business coach and consultant passionate about women in business and leadership. Find out more at www.awhimai.nz and www.iwahine.nz
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