How do you make $2 profit from every $1 sale? That was the guts of a fabulous speech by Goran Roos last night at the Churchill Club. Its hard to put Goran in a box, but he is a management consultant, entrepreneur, Professor, Chair of the Finnish version of the CSIRO and currently on loan to the South Australian Government as a thinker in residence.
Some great examples he raised around becoming more profitable were:
Mills & Boon – Who in the 60’s ended up making $1.25 profit for every dollar of revenue they made selling books. The key to this was selling (80,000 copies of) a writers manual to potential authors. This level of profitability ended once Mills & Boon changed hands.
Costco – Who use their membership fees to cover their fixed costs. They then make their real profit not on the low-margin goods they sell, but in their banking as they receive immediate payment from customers, but pay suppliers at around 270 days. Effectively they are a bank!
Pearson Publishing – Every article gets written both as a summary and an in-depth piece. The journalists become subject matter experts and write books, give speeches and provide training. So the one piece of creativity ends up having 5 or 6 different revenue streams attached to it. Interesting to compare them to the L.A. times that reacted to reduced revenues (due to the internet) by cutting editorial staff, which led to a quality reduction and eventually a death spiral.
Ryanair – Although you can technically fly for free with Ryanair if you purchase your tickets early enough and obey all their rules, Ryanair has generally become the most profitable airline in Europe. They will charge you penalties if you book late, haven’t printed out your boarding pass, want to check luggage, want to make a change, or want food and drinks on board. They charge airports to deliver passengers/customers and have advertising everywhere. Their costs are cut to the bone using second hand equipment, using staff from countries with high unemployment rates and even making staff bring their own pens if they feel they need to use one.
So increasing profits is not so much about cost cutting, which normally ends up severely damaging, if not killing, a business after a short-lived improvement in profitability, but doing two things.
1. Asking for an unreasonable outcome, such as $2 profit from every $1 sale. This sets creative juices flowing and makes your team think outside the box.
2. Looking to access new profit pools, rather than try to increase your share of existing ones. This means that you can have your profits exceed the values of your core sales.
So it appears that the key to increasing your profits is really understanding who your customers are, who all your potential customers are, and how to turn your suppliers into customers. I loved hearing that not only did Ryanir do great deals with their food suppliers, they also charged their suppliers a fee for exclusivity.