Phil Friedman

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Five Ways to Improve Your Small-Business Profits ... Now

Five Ways to Improve Your Small-Business Profits ... NowSMALL-BUSINESS PRIMER

by Phil FriedmanPRACTICAL STEPS FOR HIGHER GROSS PROFIT WITHOUT ADDED OVERHEADS...


Preface:  This is the first installment of a serialization of my upcoming eBook, Small-Business Primer : Real -World  Tips for Starting and RunningYour Own Small Business. Subsequent installments will be published at irregular intervals over the next year. Should you not want to wait for the serialization to run its course, details of how to secure a copy of the book in its entirety will be found at the end of this article.

The "case studies" cited in this series generally involve the reorganization and expansion of boatyard operations which I undertook over the last decade of so, as part of my core consulting business. Keep in mind, however, that the suggestions outlined here are equally applicable to just about any small business operation that sells products and/or services.


THE IMPORTANCE IN SMALL BUSINESS OF BOOSTING GROSS PROFIT AND GROSS MARGIN...

It’s natural for many businesses to focus on sales and gross revenues. However, in a small-business environment,  higher sales numbers don’t always mean higher profits. Depending on various factors, increased sales may actually lead to lower profits.

This is because most small businesses frequently fail to achieve the vaunted but highly elusive "economies of scale" available to big businesses. Often, additional sales volume actually overwhelms the company's established infrastructure and may require additional quantum investment in capital equipment, the bulk of which then goes underutilized.

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Incremental increases in sales may also require a disproportionate quantum increase in administrative and other staff costs, at a level that cannot be supported by the available increase in gross profit.

Consequently, in a small-business context, gross profit and gross margin are at most times, better performance indicators and decision criteria than gross sales revenue. They are also a good place to start when seeking to improve profits overall.


EVEN SMALL INCREASES IN RETAIL PRICING GENERALLY DROP STRAIGHT TO THE GROSS PROFIT LINE...

In many small businesses, relatively small increases in the retail pricing of urgent-demand goods such as engine oil and filters, drop straight to the gross profit line — indeed, often right to the bottom line.

The following example drawn from a recent consulting situation illustrates the power to boost profits through a relatively quite minor increase in retail price:

1. The small boatyard for whom I was consulting at the time performed about 1,000 engine oil changes per year.

2. Average number of oil quarts per engine oil change (including refilling the filter cannister) = 4

3. Existing retail pricing of engine oil per quart = $8.95

4. Wholesale cost of engine oil per quart = $5.37

5. Existing gross profit margin per quart = 40%

6. Gross profit per 1,000 engine oils and filter changes = $14,320.00

7. Raise retail price $1.00 per quart (total average raise in retail price = $4.00 per engine oil change)

8. New gross profit margin per quart = 46% (increase in gross profit margin = 15%)

9. New gross profit per 1,000 engine oil and filter changes = $18,320.00

10. Effective rise in gross profits on oil per 1,000 engine oil changes = 28% (from an 11% increase in the retail price of oil)


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COMPETITIVE MARKET PRICING SHOULD ALWAYS BE TRACKED AND CONSIDERED ...

During the course of studying the retail pricing structure for batteries, which the yard was selling and installing, we also noticed that the operation was charging on average about $25.87 less per battery the local store of a dominant national marine goods mass merchandiser. And the mass merchandiser's price was for carry-out,  DIY installation, whereas the yards pricing included installation. Annual battery sales for the boatyard were running to more than 1,000 units, across the gamut of groups 24, 27, 31, 4D, and 8D.

To be sure, the boatyard was purchasing its batteries from a local supplier at very advantageous wholesale pricing, and the existing gross margin was significantly better than break-even. And to be sure, it is difficult at times to get more at retail for batteries than the low DIY carry-out price offered by mass merchandisers.

But because at equal pricing, there was no advantage to a customer for him or her to pick up and tote heavy batteries back to his or her boat, there was absolutely no reason to charge less. The existing boatyard retail pricing for batteries was the result of an arbitrary cost-plus template — which is something that almost always should be rejected if your small business is to achieve acceptable levels of profit.

Consequently, we moved immediately to raise the boatyard’s retail pricing on batteries to match that of the competing mass merchandiser ― with the result that annual gross profit for this boatyard on maintenance and service goods rose more than $25,000, in a flash.


Text Copyright © 2016 by Phil Friedman — All Rights Reserved
Image credits Phil Fnedman, Google Images. and FreeDigitialPhotos net

Apply the same reasoning, evaluation, and procedures to every item that you sell — whether it's oil filters, engine water intake impellers, O/B and I/O engine lower unit lube, or other goods ― and the results start to build into the tens, or even hundreds of thousands of dollars additional gross profit. All by applying price changes your customer base will likely not resist if it even notices at all.

Understand that the objective is not to gouge or overbill your customers or clients, but rather to apply retail pricing raises to those items for which such raises will be readily accepted. The idea is to price according to what the market will bear, and not in accord with some arbitrary cost-plus template that, in my experience, inevitably results in lower profits than might otherwise be attained.  For small pricing changes in small-business contexts, more often than not, produce a relatively big boost in profit, without adding to overhead expenses.  —  Phil Friedman


Author's notes:   The next installment will deal with boosting profits by improving your capture of billable service hours.

If you found this article of value, you  might also want to look at some of my other writing about small business operations, management, and marketing:


"Avoid the Pitfall of Excessive Positivity"

"Common Myths About Starting Your Own Small-Business"

"Small Businessman's Primer to Inbound Marketing"

"Selling Bull Chips in a Bag"

"Maximizing Throughput on Fixed Assets and Overheads"

"Small Businesses Need to Keep a Close Eye on Gross Profit"


For information on securing a copy of  "Small-Business Primer : Real -World Tips for Starting and RunningYour Own Small Business", email  phil@portroyalgroup.com and put "small-business book" on the subject line.

To receive notifications of my writings on a regular basis, click the [FOLLOW] button on my beBee profile. As a writer-friend of mine says, you can always change your mind later.

Feel free to "like" and "share" this post and my other LinkedIn articles — whether on LinkedIn, Twitter, Facebook, or Google+. I ask only that you credit me properly as the author, and include a live link to the original work.

If you are interested in yachts, are allied with the yacht building industry, or operating a small business in another sector, you should consider joining my beBee Hive,

THE PORT ROYAL GROUP for Yacht Builders, Buyers and Owners

where you will find experienced industry professionals discussing a wide range of topics. The ongoing conversation is always interesting, informative, and 100% industry insider.

Finally, If you would like to discuss marketing, management, or other issues you face in your efforts to join the ranks of small business, email or message me to arrange for a free, no-obligation, 1/2-hour initial consult.


About me, Phil Friedman: With 30 some years background in the marine industry, I've worn numerous hats — as a yacht designer, boat builder, marine operations and business manager, marine industry consultant, marine marketing and communications specialist, yachting magazine writer and editor, yacht surveyor, and marine industry educator. I am also trained and experienced in interest-based negotiation and mediation. In a previous life, I taught logic and philosophy at university.

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Comments
Phil Friedman

Phil Friedman

4 years ago #29

#31
Thank you, Wayne, for the kind words. You are spot on about maximizing pricing against what the market will bear. And one failsafe indicator is that you should never be charging less than Walmart or Costco. Cheers!

Wayne Yoshida

Wayne Yoshida

4 years ago #28

Excellent advice, Phil Friedman - I especially like the battery story. We must charge the highest price the market will bear. And, there must be a "human decision factor" when establishing a price list/selling price, not just some spread sheet calculation. Sharing widely.

Phil Friedman

Phil Friedman

4 years ago #27

#26
thank you, Mamen \ud83d\udc1d Delgado, for reading and the kind words. I see small business as defined not by gross sales or number of employees, but by an essentially flat management structure. Which makes every freelance sole practitioner a small business person. Cheers!

Phil Friedman

Phil Friedman

4 years ago #26

#25
I will look for your business writing more in future, Ren\u00e9e \ud83d\udc1d Cormier, cheers!

Phil Friedman

Phil Friedman

4 years ago #25

#24
Thank you, Don, for saying so. I greatly appreciate your support -- in several different matters. Cheers!

Phil Friedman

Phil Friedman

4 years ago #24

#23
Great to hear from you, Laura. And good to see another old LinkedIn friend here on beBee. Thank you for reading and joining the conversation. Cheers for 2017!

Mamen 🐝 Delgado

Mamen 🐝 Delgado

4 years ago #23

Great idea for small businesses. I am freelance so it's not exactly my kind of business but I can apply a similar procedure for my voiceover recordings. I'll think about it... Thanks so much Phil Friedman for your generosity sharing your experience. Cheers!! 😉

Renée 🐝 Cormier

Renée 🐝 Cormier

4 years ago #22

#18
I'm glad you do! Thank you. I feel encourage to write more business related posts, now. They are always my favourite. :)

don kerr

don kerr

4 years ago #21

Just chirping in again to say I'm looking forward to more episodes of this helpful primer. Well done Phil Friedman

Phil Friedman

Phil Friedman

4 years ago #20

#20
Thanks, bud, one curmudgeon to another.

Phil Friedman

Phil Friedman

4 years ago #19

#19
Thank you, David, as always for your kind words and support. I've always considered you a friend and a comrade in the promotion of independent writers on social media, right back to the days on LinkedIn. My best to you.

Jim Murray

Jim Murray

4 years ago #18

It would be the height of arrogance to critique this article. It would also be an exercise in futility because I have no criticism. Jolly good stuff. I shared it on LI and Twitter.

David B. Grinberg

David B. Grinberg

4 years ago #17

#17
That's funny, Phil, I admire your sense of humor. However, the truth is that you are an invaluable asset to this platform. Your sharp intellect, wit, blunt reasoning, business acumen, writing skills, and constructive criticism are unparalleled (to name just a few of the qualities you bring here). That's why if you're going to Siberia, I'm going with you -- their population of 40 million can help grow this site. The only problem is that Putin may decide to annex it by the time we arrive. Oh well. Cheers, my friend!

Phil Friedman

Phil Friedman

4 years ago #16

#16
Thank you, Graham, for reading and for the kind words. I am hoping that, if it's not overly arrogant to say so, by turning my attentions back to my business-related writing, I can help nurture a greater real-world small business presence here on beBee. One reason why I follow you and read your work, not to mention that of Ren\u00e9e \ud83d\udc1d Cormier.

Phil Friedman

Phil Friedman

4 years ago #15

#15
Thank you, David, for the kind words. I am sure some people will be disappointed to discover it does not involve my being posted to Siberia. :-)!

Graham🐝 Edwards

Graham🐝 Edwards

4 years ago #14

Damn you are good!. Every Millennial in business,no matter what function should read this, and eagerly wait for more. Thanks Phil Friedman. You jogged my memory on something I'm about to get in to so this is appreciated! I better go write it down because the memory isn't what it used to be. lol

David B. Grinberg

David B. Grinberg

4 years ago #13

Many congrats on your ambassadorship, Phil!

Phil Friedman

Phil Friedman

4 years ago #12

#13
very true, Milos, on social media, one should never look a gift farce in the mouth. :-)

Milos Djukic

Milos Djukic

4 years ago #11

#12
Well Phil Friedman, when we are not sure then there is hope that something is true. As for the gifts they are essential for our own sake.

Phil Friedman

Phil Friedman

4 years ago #10

#11
Well, Milos, I am not so sure about that... since I give away so much on social media. I suppose it could be considered a "loss leader" in search of seeking market share -- ala Amazon. Anyway, thank you for reading and for the kind words.

Milos Djukic

Milos Djukic

4 years ago #9

Phil Friedman, This is professional article and useful at the same time. You're a good businessman.

Phil Friedman

Phil Friedman

4 years ago #8

#9
Thank you, Ren\u00e9e \ud83d\udc1d Cormier, for reading and commenting. I am hoping that this piece and the following installments will help fuel genuine business content by real-world business people here on beBee, especially those involved in small business. All interested are invited to join the hive "Business Hub" ( https://www.bebee.com/group/business-hub ).

Renée 🐝 Cormier

Renée 🐝 Cormier

4 years ago #7

I totally agree! In fact, small consistent changes in almost any area of your business can produce tremendous positive results. Most small business owners have no idea where they are leaving money on the table. Self-education is everything. That's why I like informative business posts and business books so much. Thanks for sharing.

Phil Friedman

Phil Friedman

4 years ago #6

#7
Thank you, Jim, for the sharing. Your work in spreading the reach of independent writers, both on beBee and LinkedIn, has always been remarkable and commendable. My very best to you for the New Year. Cheers!

Phil Friedman

Phil Friedman

4 years ago #5

CC to my business sector friends on beBee: Graham\ud83d\udc1d Edwards

Phil Friedman

Phil Friedman

4 years ago #4

#4
-- Thank you, April Lynn, for reading and saying so. I'm not sure that it is "new" except that this piece is one of the long series of business-related posts that I've done. Please feel free to check out https://www.linkedin.com/today/post/author/posts#published and https://www.bebee.com/@friedman-phil

Phil Friedman

Phil Friedman

4 years ago #3

Thank you, John White, MBA, for sharing this piece.

Phil Friedman

Phil Friedman

4 years ago #2

#1
Thank you, Kevin, for reading and saying so. I'm getting back to more business-oriented writing in 2017, here and on LinkedIn. So the comparative engagement and lead-generation stats for both platforms should be interesting. Cheers!

Kevin Pashuk

Kevin Pashuk

4 years ago #1

Thank you Professor Phil... Engaging as usual.

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