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If you’re working too hard and not making enough money…
Here’s the easy way to transform your business without spending a penny on marketing.
Most business coaches focus on marketing – but that’s not always the answer. You can use the 555 Formula to transform your small business’s profits.
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Watch the video for the story of how Mike transformed his small business’s profits, and stopped people calling him “cheap.”
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Is the 555 Formula Powerful?
It doesn’t sound much: 5% on revenue, 5% off each of cost of goods sold and overheads – in fact is sounds like something so easy shouldn’t have much of an effect at all.
But lets take a business making a nice profit. 35% gross margin, overheads at 25% of sales, net income of 10%. Apply the 555 Formula to this business and the net profit goes up 95% – almost double.
If your business is less profitable, you’d do even better! GP of 30%, overheads the same 25% of sales, net income of 5%. Apply the 555 Formula to this business and the net profit almost triples.
Finally, a loss making business can be transformed into a profitable one. Let’s say GP of 20%, overheads at 25%, so a net loss of -5%. After the 555 Formula, this jumps to a net profit of 5.25%.
555 Formula vs Marketing
What size of marketing campaign would you need to get the same results?
The best case this time is for the most profitable business. At 35% gross margin, 35% of the increase in sales drops down to the bottom line. (Contrast this with a 5% price rise – where 100% drops down to the bottom line!). So you’d need to raise sales by 27% to get the same result as the 555 Formula.
For the other two firms, you’d need 32% increase in sales for the profitable one and 51% for the loss making one.
Is even the 27% increase in sales easy – probably not. It takes time – whereas the 555 Formula is fast. A marketing campaign is always risky. And many firms don’t have the capacity to raise sales so much without investing in more people and equipement.
How to Apply the 555 Formula
The first step frightens many owners: raise prices! Think for a moment on your experience of discounting. What level got you a good response – 20%? Not for most. Mostly we’ve been trained that 40%-50% is good. So, like Mike in the video, if 20% won’t attract many people, 5% may not lose you many either. There’s much more to this – it’ll be in a later post.
Cost of Goods Sold
Lowering cost of goods sold sounds hard too – I mean, why would your suppliers give you better prices? If you don’t ask – you won’t know if they will or won’t. Practically, you can look at consolidating from many to one supplier, or going the other way – trying a new supplier at low volumes to test the water. If you make several orders a year, ask what price you’d get for a yearly order, then offer to commit to this volume for the year and if you don’t make it, you’ll pay the original, higher, price.
As well as price, the cost of good sold includes scrap and warrantee work – so look at the cost of these and work on systems to reduce both. Very often, it’s your people doing the work that can make the most amazing improvements – so consider some sort of incentive scheme to reward people who help you cut costs.
Poor stock control means that parts can be fitted and not charged for, of stashed in forgotten corners and effectively lost. No-one likes to think of this – but almost every one of your staff have ripped you off – from a notepad and pencil to systematic pillaging of your rightful profits. Make sure you have the systems in place to detect this – and if the theft gets out of hand install surveillance as far as the law allows.
Similarly with overheads – prices can fall. Utilities and insurance companies often offer extraordinary incentives for new business – so yearly swapping suppliers can save a fortune. Technology lowers prices too – for example sophisticated IVR phone systems can now be found in the cloud for less than the maintenance costs on old harware.
Then there’re the good idea at the time subscriptions to trade bodies, magazines, software systems. Get a list of all regular expenses from your accountant and review the usefullnes of each. Do the same for any loans and lines of credit, credit card fees and the like – look at consolidating loans and consider factoring (if the age profile of your receivables is good) to get cash injection to pay down the most expensive.
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Let me tell you a quick story about a small business owner called Mike.
Mike’s roofing business was started by his father and he’d worked in it most of his life.
It had always provided a good living, but recently it seemed like there was more competition.
He heard stories about the poor standards of the newcomers, but they still seemed to get customers, while he’s struggling.
His marketing costs an arm and a leg, some of it works, some doesn’t.
Mike tried discounting but didn’t get much more business and profits nosedived.
His new website looked great but didn’t seem to generate more calls than the old one.
Word of mouth was what worked had always for him
Then something happened that changed things forever…
Mike heard a story about a jewelry shop owner – Amy – with some earrings that wouldn’t sell.
Amy slashed the price just before she went on a buying trip.
When she called her assistant a couple of days later, none had sold.
She said: “double the discount” but the phone line was bad and the assistant doubled the original price instead – even as she wondered about the sanity of her boss.
When Amy got back, she went ballistic when she saw the new price, until her assistant told her that that was the last remaining pair.
The problem was…
Mike talked about this to other local business owners and they all said putting up his prices would never work.
He would lose all his business.
So he decided to do what he’d always done, more marketing.
He tried a PPC campaign with a 20% discount offer.
Things were about to go from bad to worse…
The PPC campaign did produce some leads – but at a huge cost.
With the discount, he actually lost a little money.
He was working harder than ever.
And although he tried to keep it from his family, his wife could tell something wasn’t right.
That’s when the situation truly hit rock bottom…
The worst was when a customer told him he’d recommended him “because you’re cheap”.
17 years in the family firm and he was “cheap”.
Then, something happened that changed everything…
Mike read on a roofer’s forum about some guy who had used the 555 Formula to turn a loss-making business into a profitable one.
He looked into it – that was a 5% rise in revenue, a 5% decrease in cost of goods and 5% decrease in overheads.
Mike was surprised 5% could make such a difference but thought: “5% – I can do that!”
In that moment…
Mike decided to stop with the marketing until he got his margin sorted out.
Here’s what happened next…
Mike looked at his discount, and thought: “If 20% discount hardly gets me more business, maybe no-one will notice a 7% price rise!”
His was a well-run business – so warrantee claims were rare – but he did go back to his suppliers and reduced his cost of goods sold by a little.
Then he looked at his overheads, realized he’d stuck with the same insurers and so on forever and made a big saving by shopping around.
The situation transformed because…
Well, these small changes quickly added up to a “raise” of 62% for Mike in the first year.
Mike realized was that he could use some this extra money to show people how he was different from the new competition.
Here’s how things turned out…
Mike’s got the cash now to offer serious guarantees that make his business stand out.
He’s positioned himself as the roofer who “leaves your yard tidier than when we arrive.”
He’s put in a system to capture the reviews of customers and market them to prospects – which is multiplying his word of mouth results.
And he’s just raised his prices again – and the only prospects he put off were a few complainers, whiners, and price shoppers.
It feels good, making more and working less. His dilemma now is whether to expand or spend more time with his family.
What I’d like you to take away from this story is…
If you charge too little, people class you with the cheapskates.
If your gross margin isn’t right, marketing brings plenty more work but precious little more profit.
Unless you’ve reviewed your overheads recently, you’re paying too much.
Transform your business on the inside, and then market for explosive growth.
Keep doing what your’re doing as long as you like, or learn more at …