How To Double Your Profit

You’ve now got your base case, perhaps updated.

We can use these numbers to see what has to change for you to double your profits.

Profit = (Customers * Transactions * Average Contribution) minus Fixed Costs

Five numbers and you can make assumptions about any four and calculate what the fifth must be.

Because this is the future, I recommend you add a contingency – this is a “just in case” allowance – to fixed costs for any changes you hadn’t expected.

Example of How To Double Your Profits

It is well worth doing this because you will be surprised at how small the changes have to be to double your profit.

(Customers * Transactions * Average Contribution) minus Fixed Costs = Profit

Imagine the base case was:

  • (500 customers *
  • 4 transactions *
  • £100 contribution) –
  • £150,000 of fixed costs
  • = £50,000 profit

You can double your profit and get to £100,000 profit by any one of these combinations

  • Increasing customers from 500 to 625 and leaving everything else the same – that’s a 25% increase
  • Increasing the average transactions from 4 to 5 (again 25%)
  • Increasing the average contribution from 100 to 125 (and again 25%)
  • Reducing fixed costs from 150,000 to 100,000 (a 33.3% reduction)
  • Or a composite of changes in all four measures like 601 customers who buy 4.2 times with an average contribution of 109 and with an increase in fixed costs of 25,000.

There are many different ways you can get to your desired end result.

You can do a little bit of many types of improvement or you can focus your attention on one area.

Return to P1M4 Four Ways To Profit

If you want to see the formulas to work out each element see Manipulating the Profit Formula

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