How to Cut Costs and Increase Profit in Business

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Sobowale Temiloluwa writes on how businesses can boost revenue while simultaneously cutting down on cost in 2018

In a few days, 2018 will be here. The race and strategic permutations to increase revenues, increase market share, increase share of wallet, increase all that can be increased, except increasing budgets will start. It is a generally agreed principle that cutting costs in areas where you over-spent in 2017 could increase margins for the brand in 2018.Most brands without consulting data and analytics (Historical data used for predictive analytics) cut cost randomly in areas where they believed does not deserve as much budget.

Cutting cost randomly due to heavy overhead expenses might show a decline in revenue because the area that have huge budgets might be the driver for growth and revenue while the other thousand areas that have little funding actually don’t contribute significantly to revenue and business growth, in fact all the thousand area with little funding might just contribute about 1per cent to growth. Don’t get me wrong, some organisation spend too much on segments that contribute little to the business, but the day and age we are in, tools are available to help us in this area, and most of this tools perform some of this tasks better than human.

Before you say good bye to 2017, have you learnt enough from your successes and failures in the year? The more you know of last year the better you can plan for cutting costs while increasing revenue in 2018.This next quote is the dilemma many business owners and managers face “Half the money I spend on advertising is wasted; the trouble is I don’t know which half. John Wanamaker”. In this age of data and analytics you have the capability to drill down and know what is working for you and what is not.

What was your goal in 2017? It might be to increase customer base by 50per cent. When the customers arrived you can easily enquire from them on your various channels and find out returns per channel. This will help you know which channels worked best for your goal and which ones were total waste of your budget. With this, you have identified your best channel for the total customer segment in your business, saving 50% on your marketing/advertising budget already.

Drilling down further you can look for your most profitable customer segment analyse the channel they came from. If you decide to further cut down on your budget, you can focus your spend on channels your most profitable customers came from, you are sure to keep your margins. Care must be taken (and where technology helps), to look at the segments and identify patterns for growth, cutting cost in a potentially growing area might be jeopardising the future market share expansion of your brand.

Your goal is what determines the dataset in your system that you will use to analyse your case, you can’t just blindly copy the data strategy used by another organisation, since your goals might be different ,your result and strategy should also be different.

Find here how to measure your performance in 2017 in preparation for 2018.
If your goal was to increase brand awareness in 2017, do a pre-campaign and post campaign analysis looking for lift rate in brand recognition. If your goal was to increase market share, look for competitive intelligence report in your industry, what % of the market you controlled earlier and what % of the market you control now. If you are in an industry with customer base of 5million,if you had 500,000 as share of market before and 1,000,000 now, that means your share of market increased from 10per cent to 20per cent in 2017.

If your goal was to increase customer satisfaction by x %, you need to look at the sentiment data,% reduction in the negative rating by customers and an increment in positive ratings show that customers are more satisfied than they used to be.

If you goal was to increase customer retention rate, then look for churn rate among your customers, if there is a reduction in the number of customers that churn between pre and post campaign then your retention rate as increased.so in brief, agree on your goal do a pre analysis to have a base case for measuring your success, then do a post analysis to look for % change between the pre and post analysis.
So, let’s leave backward Looking metrics of cutting cost behind to forward Looking metrics of increasing revenue.

Any time the word increase revenue comes up, most organisation tend to think first of increasing share of market, and so, the focus will be on branding, advertising and huge spend on marketing. Increasing revenue via market share growth is war against the competition, or market leaders who will not fold their hands and watch you take away market share and revenue from them.

These wars cost a lot of money but the return per naira you will get on spending the money on such huge campaigns might as well be invested in other area of business with better returns. If you are a new entrant in the market, you need brand awareness and you can’t escape the initial investment in branding, advertisement and marketing.

So you will say, how will I grow revenues without growing share of market and spending so much, this is simple, go for increased customer share of wallet using data driven marketing.
“65% of a company’s business comes from existing customers, and it costs five times as much to attract a new customer than to keep an existing one satisfied.” Source quoted as Gartner

As you can see, it is just simple wisdom to keep existing customers rather than try to acquire new ones like most businesses do in the Nigerian market. In fact research as shown that an increase in customer retention by 5% can increase profits between 25%-100%.That means if a business is spending so much to increase customer base and it sees just little difference in profitability or no profitability at all, the business has a very high rate of customer churn (customers leaving shortly after they were acquired).

So having solved the issue of customer churn, we move to issue of increasing share of wallet of the customer. Share of wallet (SOW) is the percentage of the customer’s total spends that you can capture over the lifetime of the customer relationship. It is that simple, if you have 10 products and you acquired a customer through one of the product, your ability to upsell and cross sell will determine how profitable you will become. A proper data driven marketing structure will make it possible to identify customers who will be interested in your offer, even though they never asked for it, Various intelligent marketing technology have been built that can help you target personalised campaigns/products to specific customer segment, increasing the share of pocket from this customer.

A note of caution, not all the customer you send offers too will take it ,but if the offer is good enough and your technology has identified historical patterns of people who bought the product in the past ,you have a chance of seeing a huge take rate of your offer.
A single digit take rate on two new products offers to existing customers can increase revenues/profits by 100-500%.

Since no business ever has limitless resource to go round all customers (offers, discounts, personal services) etc, then you need to know how to prioritise your offers to customers who give you the most margins. Here the 80/20 rule is the key, if you can identify the 20% segment that gives you 80% revenue, then going after such customers in your data base and upselling such means your revenue and profit will see a leap, the other side of the coin is this, if you spend all your limited resources on the 80% that give you a 20% revenue, then you might spend so much and not see any significant change in revenue ,in fact while you are chasing the lower segment generating 20% revenue, if a major % customers generating your 80% revenue churn, you are likely to end up worse than you started the year even though you have spent more money than expected.

The rule, retain your customers more, use data and analytics to dig deeper in identifying your best segments, upsell and cross sell these segments with personalized / targeted offers and products(increasing share of wallet),you are sure to see a revenue growth at a far lower cost that doing your normal market share increment campaign.

If you want to turn your revenue growth to profit, you need to target your most profitable segment, using data and analytics to drill down further to customers in this segment, that have the lowest cost to serve. If you target this new segment that has high revenues and low cost to serve, you are sure going to increase margins and profitability. (Value based segmentation).
That said, if you try building a data driven organisation.(marketing and decision making)you are likely to face the following challenges.

1. Limited or no data available:
Solution
Start by collecting the right data for your goal and move on from there, look for the 20% data that will deliver the best result for your goal.it is better to be approximately right in your decision making using data than exactly wrong using assumptions.

2. Lack of resources and tools
Solution
When starting out you don’t need a big analytics or data manipulation tool to start, a simple software on your laptop can start you out on the journey and you can expand to bigger databases as you go along. Human resource is also a problem, you need to get external help to start, enforce skill transfer to your internal teams over the period of the project.

3. We have so much activity running at the same time how do we know which is most effective.
Solution
From the beginning plan for measurement, make sure measurement parameters for each activity have unique and recognisable patterns, this makes it possible to identify what works and what is not working, during and after the campaign/project.

Over all, you need to start small, do trial experiments, learn from the experiments, discard what is not working, and scale what is working. Doing this over time builds you into a data driven organization. Becoming a data driven organization gives you so much competitive advantage over the competition who don’t, you suddenly see revenues and profit grow, while your cost reduce year on Year. How cool will it be for you to increase Year on Year revenue by 200% while cutting cost by 40%, only data and analytics makes this kind of dream a reality. All the best as you wind down year 2017, taking all the lessons learnt from failures and successes, while you plan ahead for 2018.

– Sobowale Temiloluwa is the CEO of insightful business analytics limited, a data and analytics company focused on strategic brand marketing and business analytics. He is a co-founder at www.entrepreneurship.ng. EMAIL: Temiloluwa@conversiontracker.com


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