How to ramp up profit without the expense of expanding

Scaling a business might appear to be the best way to grow its profitability but, in the quest for expansion, entrepreneurs may be missing a vital point. In fact, this focus on sales volume growth could actually be undermining the ultimate goal of making healthy and sustainable profits, says author and business growth expert Kent Billingsley in his book Entrepreneur to Millionaire.

Instead of simply growing existing lines and bulking up your overheads, look again and see what else you can leverage from your existing assets and add to your bottom line, he advises.

“In every company sits a treasure chest of profits from existing assets waiting to be unlocked, and there are so many ways to make extra money leveraging the assets, resources and team you have that don’t cost money. The gap between the top line and the bottom line is where you create business wealth,” he tells The Irish Times.

To untap this, don’t obsesses about chasing new clients but instead grow revenue from existing ones, minimising your marketing and sales costs to hold onto more cash, is his advice. Typically, however, organisations do the opposite, growing costs and slashing profitability, in his experience.

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Companies don’t need more leads, they need better ones and to have higher strike rates. They don’t need more salespeople, most have enough to double or treble their sales. They don’t need more marketing materials as most information doesn’t accelerate the sale. What they do need is higher-quality customers who pay more and bigger, better and longer-term contracts, he maintains.

Slashing costs and squeezing employees and suppliers is not a formula for building wealth, he says, and entrepreneurs need to think more deeply about their models if they find themselves experiencing cash issues, he says.

Billingsley has plenty of corporate experience to back up his theories. After graduating from college in Dallas, Texas, he spent five years working at a division of PepsiCo before joining Ross Perot’s tech firm EDS (later bought by HP). He rose to become chief strategy officer and chief marketing officer for its Asia Pacific division before leaving to play a leading role in a successful start-up software company in the noughties.

This proved the foundation for his Revenue Growth company, with consulting and speaking engagements across 36 countries based on his ideas about unlocking growth and maximising profitability for entrepreneurs.

Homespun narrative

Billingsley’s book draws heavily on this work and appears to be aimed squarely at SMEs and start-ups, though he maintains that the vast majority of businesses don’t follow the principles he outlines and therefore struggle with cash issues. It eschews research from global management consulting houses and academics and instead has a homespun narrative running though it. While some of the advice here seems obvious, all too often entrepreneurs don’t follow it, is his experience.

Every new venture should identify a fundamental marketplace problem (FMP). There are three aspects to this: the foundational cause, the marketplace scope and the degree of pain. Billingsley outlines four criteria to create a basic business model design (see below). No business model is flawless and every type of business architecture has advantages and disadvantages, he observes.

A good model design provides you with three essential ingredients: it gives you speed to market, which accelerates client acquisition and revenue; it provides scale, which ramps up profit without adding costs; and, finally, it generates an attraction factor, with better-quality clients coming your way.

In developing products and services, consider your unique selling propositions, he also advises.

“You have to give your client a compelling reason to buy from you. Too many companies have what looks to be the same offering and when buyers can’t differentiate, they usually buy based on known brands or low price, the two worst reasons to make a purchase decision.”

Having multiple revenue streams is one of keys to driving profitability. The author draws the analogy of streams merging into powerful flowing rivers. Think of your business as having the same capability as a smartphone, he also says. These clever machines have replaced at least 50 different tools and functions, serving as cameras, compasses, email services, calendars and radios among a host of other things, he notes.

Revenue streams fall into different categories. There are simple transaction streams where you sell a product, or project streams where you sell a service. These are often one-time in nature. But consider also the possibility for recurring streams such as subscriptions and unconventional revenue streams (see below). The trick is to have as many as possible.

“One method is not superior to the other. Using several forms can allow prospects and clients to test and evaluate your value without taking the painful risks of a long-term contract. You need to use a combination of methods to attract and rapidly grow your revenue river,” he advises.

Unconventional models

Consider unconventional models, he says. Fast-food retailer McDonald’s doesn’t just make money from selling meals, it is in the franchise and real-estate business. It buys valuable real estate, such as hard corners, and leases it back to its franchisees for a premium, generating tens of billions of dollars a year in the process.

Similarly, electrical goods retailers stretch their margins by selling extended warranties, moving them into the insurance sector, while insurance companies capitalise on the cash from client premiums by investing money in financial markets.

Covid-19 has exposed a lot of companies with flawed single-income stream models, he says, and entrepreneurs owe it to themselves, their families and their employees to think about more robust models that will survive such crises. One way to do this is to think of the business from an exit perspective.

“Think of your business as a franchise. If for any reason I had to sell it, do I have the processes and protocols in place for someone else to run it? How much can I de-risk in this model so that the valuation is what it should be? Consider issues such as consistency of revenue, predictability of cashflow and the strength of your customer portfolio.”

Getting the fundamentals right

Kent Billingsley says four criteria are necessary to create a good basic business model. These address what he calls a fundamental marketplace problem (FMP).

The problem What problem needs to be solved? Is it a consumer, B2B or government market? Is the market growing or shrinking? Is your market vertical (single industry) or horizontal (common need in multiple industries).

Your offering What are your best ideas and methods to solve this problem? Is it a product, service or combination? Do you need to build it? If you are offering both products and services, are there synergies?

Suppliers and partners External providers are a blessing and a curse, says the author, but a great model design involves more of the former. Your enterprise model architecture will determine who and how providers help your company to be successful.

Competitors and substitutions What competitors are working to solve the FMP? Is the market saturated with options or are buyers frustrated with limited options? Besides traditional competitors, are there substitutions or "work-arounds" giving buyers reason not to buy your products or services?

Entrepreneur to Millionaire: How to Build a Highly Profitable, Fast Growth Company and Become Embarrassingly Rich Doing It by Kent Billingsley is published by McGraw Hill