
Imagine this scenario: After working hard to build your construction business, you find yourself wanting to take it to the next level. You know that increasing your profits is the key to unlocking new opportunities and reaching your goals. But where do you even begin? Which aspects of your business should you focus on to make a meaningful impact on your bottom line? These are the questions that might be running through your mind right now.
Conventional wisdom might lead you to believe that success in the construction industry comes from hard work and learning from experience, but the truth is that such strategies are becoming increasingly ineffective. As the world changes, successful business owners must be willing to adapt and focus on the areas of their business that provide the most leverage to increase profitability.
After years of experience working with trade and construction clients across Australia, Your Business Navigator has discovered that there are five strategies that businesses need to focus on to increase profits, and hard work is not one of them. These five strategies are increasing leads, increasing conversion, increasing job value or prices, reducing job costs, and reducing overheads.
1. Lead Generation
Leads are the lifeblood of a company. By generating more leads, you increase your chances of finding people who are interested in what you have to offer. If you can nurture those leads and turn them into paying customers, you’ll be able to increase your sales revenue and grow your business.
Let’s examine the terms first.
Sales revenue and net profit are both important financial metrics that provide insights into a company’s financial performance, but they represent different aspects of a business’s operations.
Sales revenue, also known as “revenue” or “sales,” refers to the total amount of money generated by a company through its primary operations, such as selling products or providing services. Net profit, also referred to as “net income” or “profit after tax,” is the amount of money a company has left after deducting all its operating expenses, interest, taxes, and other costs from its total revenue. This would mean that a higher sales revenue can potentially lead to higher net profit, if the costs and expenses associated with generating that revenue are managed effectively.
In the case of lead generation, increasing your lead flow by just 10% can fuel a remarkable 10% growth in jobs. That means going from 500 to 550 jobs created. But it doesn’t stop there – with these additional jobs, your sales can surge from $1.5 million to $1.6 million. Incredible, isn’t it?
Now, let’s talk about the bottom line. This boost in sales deducted by your costs, gives your net profit a serious lift, taking it from $75,000 to a staggering $112,500 or a 2% net profit increase. That’s a hefty jump!
Here are some tips on how to generate more leads:
- Get your marketing game on point: You can increase your visibility by advertising, optimising your website for search engines, and crafting persuasive messages that encourage customers to buy from you.
- Sweeten the deal: Offering guarantees or other value adding incentives is a great way to encourage potential customers to make a purchase.
2. Conversion Rate
Once you have more leads, you’ll need to focus on converting them into paying customers. A higher conversion rate means that a larger proportion of your existing leads are becoming paying customers. Looking at the numbers on the table, we will see that raising the conversion rate would consequently increase the number of jobs or projects. More jobs mean more sales, which is why the annual gross profit shot up by 37,500 AUD with a 10 percent increase in the conversion rate. i.e., from 500 to 550 Sales.
Here are some tips on how to improve your conversion rate:
- Make the sales process easy: Streamline your checkout process, provide upsells and cross-sells, and do everything you can to make it easy for customers to say “yes” to your products or services.
- Show appreciation: Exceptional customer service goes a long way in turning prospects into loyal customers. Take the time to give top-notch support and build that trust.
3. Price Increase
Perhaps one of the most delicate topics is increasing your prices. A significant price hike could potentially lead to reduced customer demand, so finding the right balance between price optimisation and maintaining customer loyalty is crucial.
On a good note, strategically increasing your job value improves profitability. When you increase the prices of your products or services, you’re essentially making more money from each sale. This means that for every unit you sell, you’re earning more revenue.
Let’s look at the numbers. If we increase the prices by 10 percent, while retaining the number of jobs, job costs and overhead, you will get a 100 percent increase in net profit. You’ve basically doubled your gains – which proves that changing the average job value (price of your services) has a greater impact on profitability than either lead flow or conversion rate.
Be sure to think about the value you provide and the profitability you need to maintain to achieve success. By strategically adjusting your prices, you can generate more revenue from each transaction.
4. Decrease direct costs
Decreasing your direct costs is a great way to impact your profits. By doing this, you’re essentially making the expense portion of the pie smaller. When costs decrease, more revenue remains after expenses are covered, leading to an increase in both gross and net profit. Say we decrease our job costs by 10 percent and retain the number of jobs and overhead costs, this will increase our net profit by 112,500 up to 13 percent from 5%. Not bad right?
Here are some strategies to help you do just that:
- Improve your negotiation skills: Work with suppliers, Sub-Contractors & Equipment Hire facilities to secure better deals and lower your expenses.
- Embrace automation: By automating routine tasks, you can eliminate some labour costs and boost efficiency, allowing you to do more with less.
- Get smart with your materials: Look for alternative materials that are not only cost-effective but still maintain the high quality your customers expect.
5. Overhead Decrease
Finally, you can decrease your overhead costs – those extra expenses beyond your direct materials and labour. By reducing indirect costs, a larger portion of each dollar earned in revenue becomes net profit. This can happen without increasing sales, simply by keeping more of the revenue as profit rather than using it to cover overhead. In this case, a decrease of 10 percent of overhead costs has led to an extra 35,000 AUD in profit or a 2% increase in Net Profits. This gives you more resources to invest in growing your business.
Here are some tips on how to lower your overhead costs:
- Consider downsizing: If you’re paying a fortune for office space that you’re not fully utilising, it might be time to rethink and find a more suitable, cost-effective location.
- Go digital: Embracing paperless processes and utilising digital solutions can help cut down on office supplies and shipping costs, saving you a nice chunk of change.
- Think energy efficiency: By choosing energy-efficient utilities, you can reduce your monthly bills and do your part to help the environment.
Reviewing the numbers, we can see that improving all five creates a tremendous increase in annual net profit.
Success is about understanding where your business’s strengths lie and maximising them. While it might be tempting to believe that the only way to increase profits is to work harder, an optimisation of these five strategies can significantly improve the bottom line without putting additional pressure on your already busy workload.
At Your Business Navigator, we are experts in providing trade and construction businesses with the guidance and mentorship they need to optimise these strategies and achieve unprecedented growth. By understanding the complexity of the trade and construction industry while balancing it with a modern outlook, our approach allows clients to reach new heights in profitability and find success in the constantly evolving world of construction.
Contact us today to find out how we can help your business transform.