The Profit Formula

How to multiply your profits

The Profit Formula

Week 1

Why is business so hard?

It feels like every time something works, something else breaks. Marketing starts to work and revenue goes up, but so do costs.

How does anyone make a profit?

This week’s simple strategy is what I like to call the “Profit Formula”. It’s a simple strategy I use, that you can apply too, to steadily increase profit in your business.

The Simple Strategy.

Increase all four to multiply your profit.

Customers x AOV x Frequency x Margin = Profit.

-Nate

The fundamentals

When I started my first business, I started with a physical product. I sold a business planner for $32 (it works really well!).

COGS were $18 per planner on the first limited run, and customer acquisition was between $5 and $10 depending on the channel. So I was making between $4 and $9 per planner.

The first year, I didn’t plan to make a profit, so I was ok with the really low margin. Maybe my ads would start to work, or my instagram would land a viral vid. I’d hit that hockeystick growth and be able to buy in bulk to drive COGS down!

But the hockeystick never happened.

My customer growth was good, but slow; slower than I needed to take care of my kids. I was bringing home no bacon, it was all back in the business.

So I interrogated my own business like I used to do as a consultant.

I realized that there are only 4 ways to grow profit in your business and I was only thinking about one of them. I was only thinking about new customers.

The Four Pillars

To increase the PROFIT (not just the revenue) in your business, you can increase:

  • Customers: the total number of customers

  • Average Order Value: the average that they spend on your products or services

  • Frequency: how many times a year they buy from you

  • Margin: what you make when they buy.

The formula looks like this C x AOV x F x M = Profit.

Without profit, you can’t stay in business. You can’t reinvest in your business, or support your employees or family. Your business suffers and since you have a gift to share with the world, your customers suffer too.

Profit is important!

“A lack of profitability is consistently the major reason cited for business discontinuation.”

Mike Michalowicz, Profit First

Each one of these 4 pillars has a few more sub categories, but for now we’ll focus on just the big buckets.

Most entrepreneurs (myself included in that first year) think that all you can really do to grow your business is focus on marketing to get more customers.

But the trouble with only using marketing to grow your business is that your expenses often climb at nearly the same rate as your revenue. It can be a difficult path, especially when you’re bootstrapped and don’t have thousands to burn on ads.

Rather than using just one of the variables, if we learn to use all of them, we get to take advantage of a hidden superpower.

Multiplication. 🚀

doing some maths.

When you increase all four of the variables at once, you can get a multiplied effect.

To illustrate this, lets do some more maths.

Another Example. ☕️

Imagine you’re helping your friend with his business. He runs a coffee roaster that sells online.

He currently has 10,000 customers, sells one bag of coffee at a time for $10, 3 times a year per customer and makes about $1 per bag after all expenses (includes employees and rent). He’s got a business that is doing $300,000 in revenue, but is only getting paid $30k. 😞

If you only increase customers, say by 19%, you get an almost imperceptible change in profit. It goes from 30k to 35k. That feels like luck.

But, if you increase all 4 by just 19%, which is super reasonable, you can double profit. 🥳

Watch what happens when you increase it for just one, then two, then three and four variables.

Customers

AOV

Frequency

Margin

Profit

10,000

$10

3

10%

 $30,000

11,900

$10

3

10%

 $35,700

11,900

$11.9

3

10%

 $42,483

11,900

$11.9

3.57

10%

 $50,555

11,900

$11.9

3.57

12%

 $60,160

A small change for just one variable, like increase in customers doesn’t feel like much. But, when you do it for all 4 variables, you DOUBLE YOUR PROFIT.

Wouldn’t you like to double your profit? I would like you to.

Question.

You probably have a plan for marketing and how you’ll increase your customers this year.

  • Do you also have a plan for increasing AOV, Frequency and Margin?

Cause if you do, you get to use multiplication and make that profit soar.

End.

The simple strategy for today is to make a small bump up across all four pillars of your business so you can multiply your profit.

C x AOV x F x M= Profit. 

Catch you next week!

-Nate

P.S. Whenever you’re ready, I help bootstrapped entrepreneurs increase their profit in two ways.

  1. Boost your business with a tailored 1-hour strategy session, 1-on-1 with me. These are best for businesses in the launch stage, usually under $200k in revenue. You can accomplish a ton in an hour.

    Book your call here 

  2. Elevate your profits with our structured 3-month program, focusing on foundational growth, strategic direction, and actionable plans. A cross between coaching and consulting, it includes 2 major deliverables; a financial analysis and a strategic plan that you can actually use. These are best for businesses that are scaling, usually between $200k and $1.5M.

    I have one open spot. Book a call here 

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