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profit

Making an offer

A few days ago I wrote about a beautician sign offering 50% off clients, focussing on the poorly communicated message.

I have another issue with that sign, and their special offer for new clients.

Offering new clients a major discount (50% is big) may well bring in more customers and keep them busy, which is obviously a good thing for  business. However, there are some other parts to this offer:

  • how many of those clients will come back to pay twice as much for the same service? Does the business make enough profit from one half price service to warrant the discount if they never return?
  • are they cheapening their services with this offer? are they giving a message that their services are so over priced they can afford to take off 50%?
  • are they concentrating on new clients at the expense of existing, repeat customers?

There are other ways they could attract new clients through specials, such as:

  • new clients get a discount voucher for their second visit – even if it is the original 50% discount, at least they have paid full price once and you are teaching them to come back
  • customer rewards where they get a free {specific service} every five visits
  • new clients get a free {extra service} when booking over $x in services
  • new clients get a goodie bag on their first visit – include discount vouchers, relevant product samples, vouchers from complementary businesses, a chocolate, a branded pen/magnet/etc, and so on

What’s imortant to remember with special offers is that you continue to make a profit and that the offer won’t hurt you more than it helps.

Paying yourself and profit

Yesterday, I wrote about the definition of profit. As a small business owner (that is, a sole trader or partner rather than a company or trust,) how do you get paid – it is an expense or does it come from your profit?

Depending on how you have set things up, it could be either way, or even both.

1. you pay yourself a salary/wage

If you pay yourself regularly as you would any employee, then your pay is an expense – as are the workers compensation, superannuation, PAYG and other employment expenses. Your pay is removed from your turnover before you calculate profit and your profits are in addition to your income.

2. you don’t get paid a salary/wage

If you get money from your business on a less formal arrangement, such as only when there is enough money in the account or as you need it, you take drawings from your investment in the business. Drawings are not counted as an expense so they come out of your profits. The more profitable the business, the more money you can draw upon, but if there is little profit, you can’t access much.

 

Earning dollars to make profit in your businessEither way, your profits are there for use in the business or for you to take as drawings and spend however you wish. The distinction is important in accounting terms for the following types of situations:

  • you are taxed on the profits of your business
  • calculations based on your profits (eg x% of profits as a donation or as rent)
  • applying for financial assistance (loans, etc) and facilities (merchant accounts, etc)
  • division of profits with a partner (if in a partnership)
  • valuations of your business for insurance or selling purposes

How do you get paid from your business? Why do you manage it that way?

What is profit?

I have seen a lot of businesses recently offering a proportion of sales or profits to the bushfire appeal, and seen/heard various discussions about this. What thing that has stood out to me is that not everyone understands what a profit actually is, so I think it’s time to discuss it!

The concise Oxford dictionary gives the following definition…

profit: 1. advantage, benefit 2. pecuniary gain, excess of returns over outlay.

Or as a verb, it defines it as bringing or being of advantage.

Profit is different to proceeds or turnover which is the total amount of money coming into your business from customers. If you sell 10 items at $50 each, your turnover is $500 but your profit could be a lot less.

Simply put, profit is the money left over once you have paid all your business expenses. Or you can view it as profit = turnover – expenses.

So continuing from the above example, if each item costs you $20 to make and your overheads are $10 per item, your expenses are $30 and you will make $20 profit on each item. So from a turnover of $500 you will make $200 profit.

Expenses are everything your business spends money on to conduct business. As well as obvious costs such as materials and equipment to make products or products from a supplier, it includes what are known as overheads – the cost of electricity, marketing and promotions, staff, office/shop space, insurance, registrations, legal fees and so on.

Getting back to making donations as a business, ‘100% of profits’ would mean a $200 donation from the sale of 10 items whereas a ‘100% of proceeds’ would mean a $500 donation.

tracking advertising

A few days ago, I was reminded of the importance of tracking advertising through a story a friend told me.

The story: a company spent $60,000 or so on an advertising campaign, but didn’t implement any means of tracking the results of the ad. Meaning they have spent $60,000 and have no idea if it raised their brand awareness or brought in customers and revenue (I’m not sure which was the aim of their campaign.) So when the radio stations come back and ask if the company wants to repeat the ad, who knows if they should say yes or no…

The moral: tracking advertising is important for a number of reasons:

  • makes it easy to decide on a repeat of the campaign
  • helps you better understand your demographic (e.g. they may listen to the radio but not respond to the type of ad you ran)
  • assess the ROI (return on investment) and value of the campaign – $60,000 is nothing if it results in $500,000 of sales, but it is a ridiculous amount of money if it results in $100 profit
  • tracking and comparing different ads allows you to decide the most effective advertising for your business (e.g. radio vs TV vs major newspapers vs local advertising) PLUS you can tweak the actual ad to find the best presentation, too

Even if your budget is nowhere near $60,000, tracking of advertising is a worthwhile exercise.

Don’t assume that free ads aren’t worth tracking, either. Why?

  • the results from a free ad can be a useful comparison with paid advertising
  • free ads can be a great place to test different wording and formats for your ad before you pay for its placement (assuming a very similar audience of course)
  • if the ad is free in monetary terms but costs a lot of time, tracking will help you determine if you are getting enough reward for your time
  • a free ad may be attracting the wrong people – people who don’t become customers and use up your valuable time. If you know many false leads are coming from a certain ad, stop that ad even if it is free!

Have you used tracking with your advertising? Did you find it a useful activity, even if tedious and time consuming?

 

P.S. You can read more about the basics of tracking your advertising or assessing the results of tracking in my articles.