Most business owners measure their financial health by whether or not they have cash in the bank. Cash is very important and not to be ignored, but what is often overlooked to measure true financial health of a business is profit.
Profit is ultimately how much you are keeping after your expenses. We often relate this to a Profit & Loss Statement or a total profit for the business. Your profit margin is your profit divided by your revenue, or simply put, the percentage of money you are keeping after your costs.
I want to challenge you as a business owner to think about profit not only in the form of total profit margin but at an offer level.
Understand that when looking at your profits, you need to identify which of your costs are direct and indirect. Direct costs are the costs that are specifically related to making and delivering your product or service. This could be your subcontractor costs that help serve your clients, specific software, materials and so on. Indirect costs are things like marketing, HR, accounting, legal and so on. These are operating expenses that you need to pay for but that do not have anything to do with how much you sell.
Your gross profit margin on your product or service should take into account the direct costs. From there, you can determine which of your products are the most profitable at their core, and not just base it on what brings in the most revenue.
Let's use an example of an online coach. Here is her price sheet:
1-1 Coaching for 3 months (2 people): $5,000 each
Group Membership for 3 months (10 people): $750 each
They each get 12 calls with the coach, but the membership gets one extra 1-1 kickoff call. She pays another coach to do the calls and that coach charges $200 for each coaching call.
So, which offer is the most profitable? How should we look at this?
So here is her profit over those three months:
1-1 Coaching: $10,000 - $4,800 in calls = $5,200 in profit
Membership: $7,500 - $2,400 in calls - $1,000 in 1-1 calls = $4,100 in profit
So, you would think1-1 coaching is more profitable, right?
A 1-1 client pays $5,000 but costs $2,400 to provide services. That is a 52% margin ($2,600/$5,000). A membership member pays $750, but it only costs $200 to provide services. That is a 73% margin.
How does that work?
Because every time you add a new 1-1 client, you are also adding costs. There is a whole new set of coaching calls you need to deliver for each client and you need to pay your coach to do it.
But, for the membership, she is holding the calls no matter how many people attend and not adding new calls and new costs to her plate by adding new members. Her cost does not go up each time someone signs up. Whether there are 1 or 100 members, the cost remains the same to host the call.
Therefore, her actual PROFITABLE offering is the membership.
Business owners, especially service providers, can gain a lot of insight from figuring out their profit margins and applying that to their decision making. Once you know what offers are the most profitable, you can then direct your marketing, messaging an sales copy toward encouraging people to purchase that offer, maximizing your profits and what you get to take home.
Interested in more tips on how to keep what you earn? Check out our podcast for new episodes twice a week.