How To Determine Your Service/Product Profit Drivers (Use These Calculations)
- January 11, 2021
Your high-tier offers aren’t always the biggest profit drivers in your business.
You’d be surprised to find that sometimes, your low-ticket or mid-ticket offers might be your biggest source of revenue. The thing is—not every business owner knows what their profit drivers are. Since revenue is only one part of the equation, profit drivers can be hidden in plain sight.
Let’s shine some light on the profit drivers you didn’t know existed. As an ELITE Coach and founder of Jeronamo Solutions, Monique Morrison has figured out exactly how to know what products and services are bringing in the cash—and which are burning through it. In her Lab workshop, she went over how to look at your revenue vs. resources to build an evergreen growth machine.
We’re going to take a look at part of that training today, with a point-based system that Monique’s nailed down to show us what the real profit drivers of our business are.
How To Calculate Your Profit Drivers
Step One: Make a list of your products and services
Consulting? Done-for-you services? eCommerce products? Write down everything you sell so you can figure out which of these services/products is a profit driver. If you’re selling a lot of different eCommerce products, you can categorize them if that makes more sense for you.
Step Two: Average how long each of these products/services takes to complete
Monique does this with a points system. For every 1 hour spent on a task, she gives it 1 point. This points system is going to help us figure out your average revenue per point to figure out your profit drivers.
For Jeronamo Solutions, their website building service requires about 30-45 hours of the team’s time. This means it requires about 30-45 points. Their marketing services average 12 hours or 12 points.
You don’t have to break your points up by hour if you find that some products/services take less than that time. You can allocate 15 minutes per one point if that works better for you. If you don’t know exactly how long a service/product takes, estimate the time (and then points) so you can get an idea for your profit drivers. Then, start time tracking so you can get an official average of how long each task takes you and update your calculations.
Step Three: Figure out the average number of units sold
How many units do you sell on average of a product or service in a set amount of time? You can do this monthly, quarterly, or annually if you’re reflecting on the past year.
Step Four: Write down the price per unit
How much does each of these services/products cost individually? Write down the price per unit for every product/service on your list.
Step Five: Calculate the Average Revenue Per Sale
It’s time to grab your calculator. The next few steps are going to be calculations that are going to show you what products and services are the real profit drivers of your business. To figure out the average revenue per sale:
Multiply the average units sold by the price per unit to get the average revenue per sale. Do this for each of your products/services. Bring that number with you to the next step.
Step Six: Calculate the Average Revenue Per Point
This is the moment we’ve been waiting for. You’re going to see what the true profit drivers of your business are—and not fall into the trap of thinking your high-ticket offer is your highest revenue source.
To calculate the average revenue per point:
Now you know how much you’re making on a per point basis. If your points are equal to 1 hour, you’ll know what you’re making hourly on each of your services/products.
You officially know what services are providing you the highest revenue per point. Now have your profit drivers! Finding your Average Revenue Per Point will give you those “Ah-ha!” moments of figuring out where your revenue lies in terms of optimizing time spent.
Knowing your profit drivers might mean your business is taking a big shift. Maybe your low-tier offers are your profit drivers, or maybe you were spot on in thinking your high-ticket offers were your profit drivers. Either way, it’s time to take some action. Now you can shift your business towards these profit drivers, and away from the services/products eating away at your resources.
How To Capitalize On Your Profit Drivers
Isn’t data amazing? It takes us from saying, “I think this is the best direction for my business,” to “I know this is the right direction.” Knowing your profit drivers, we can now figure out how you can shift your business to allocate more time towards them.
Let’s look at what *wasn’t* a profit driver. We don’t have to throw those offers right out the window, but we do want to figure out how we can make them either take less time or cost more so they have a higher Average Revenue Per Point.
Here are some questions to ask yourself as you try to create profit drivers out of not-so-profit-friendly offers:
- Do we need to keep this service/product?
- How can we make this service/product take less time and resources?
- What can we add to make this service/product more expensive?
- When will we make these changes?
- When will we run through these calculations again to see if this offer has turned into a profit driver?
Notice the last question. It is so important that you not only make changes to your offers that are holding your team back, but that you’re putting them to the test. These offers need to be upgraded, and then they need to prove their still worthy of sticking around.
Running these calculations regularly will keep your business running smoothly. As Monique puts it, this is how you create your evergreen growth engine. When your offers are all profit drivers—your business is the one everybody else is jealous of. It’s the business that’s built on profit-driving data that ensures you’re spending your time and resources on the right thing.
And, it’s the business that can withstand more storms. Ryan Deiss talked about anti-fragile marketing at the 2020 T&C 360i event, and Monique’s revenue vs. resources approach fits perfectly into his perspective.
Building a business on a foundation of profit-drivers, and recalculating regularly so you know when one of those profit drivers has gone astray, will help your business be anti-fragile.
Use Monique’s Point System to be confident in what services/products you should be spending time on, and which you need to seriously contemplate breaking up with. And also, feel free to throw these calculations in a spreadsheet so you can have the computer do the calculations for you. (You know we had to add a way to make this even more efficient).
The post How To Determine Your Service/Product Profit Drivers (Use These Calculations) appeared first on DigitalMarketer.
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