I talk with many business owners who tell me their goal is to increase their revenue by X% next year. “Great, how are you going to do that?” is usually my response. Many of these owners haven’t really thought through a solid plan to increase their revenue. The response is often a new marketing method or maybe increasing prices, but usually, those are not well thought out either. For instance, starting to market on Facebook is probably not going to drive 10% revenue growth for the next year.
It may come to surprise to you that there are essentially only four methods in which you can increase revenue for your business. Within each of these methods, there are several strategies and tactics one could take. All of these strategies include an assumption that you have a solid marketing, sales, operations, and financing team in place. Let’s explore the four methods and some of the strategies and tactics a small business owner could take.
1. Raising Prices
There is not much explanation with this method….you simply raise your prices. Setting your prices can be somewhat complicated and can be done using a number of different strategies. If everything stays the same (i.e. volume, frequency) then simply raising transaction prices will increase revenue.
There are typically two types of pricing models that small businesses follow; cost-plus pricing and value-based pricing. In cost-plus pricing, a business adds a mark-up percentage to their costs. The biggest determination in this is often figuring out what the true costs are. For instance, how does a business factor in their overhead when using this method? In value-based pricing, a small business owner determines how much value they are providing the customer and charge them accordingly.
No matter the method they use to set pricing, odds are the inputs and variables are changing often. It makes sense then that businesses adjusting thier prices regularly. For example, in Colorado, we have had 12% increases to minimum wage the past 3 years. As a business owner, I have a decision whether I am willing to live with decreased profit margins or if I will pass this along to the customer.
One additional item most owners don’t contemplate is how they will raise their prices. Will they make an announcement to their customer base or will they simply increase their prices? The answer to this depends and companies do it both ways. For instance, I have received notices from Netflix informing me they will increase my subscription rate. However, I have never heard Chick-fil-A announce increases to their prices.
2. Increase the Number of Customers
By increasing the number of customers, if all else stays equal, a small business will increase your revenue. If it was only that easy…..
I tend to look at increasing customers as a sales and marketing strategy. A good finance and accounting team can go a long way in identifying potential customer profiles and helping coordinate with the marketing team who to target. However, it is often up to the marketing team to craft compelling messages to bring more customers in. There are many tactics for doing this, however, because they mostly fall within the realm of marketing, we won’t review them in this article.
3. Increase Average Transaction Size
While this might sound a lot like increasing prices, it is in fact different. This is more commonly referred to as “upselling”. In a restaurant, for example, they might have their wait staff push more appetizers or offer nightly drink specials to patrons.
One of my favorite examples of this is trampoline parks. If you have kids between 8 and 14, odds are you might have visited an indoor trampoline park. Most trampoline parks either require or strongly recommend that you use their socks. Their socks have rubber stoppers on the bottom, which will supposedly stop you from slipping on the trampoline. I can tell you as someone who buys socks for one of my small businesses, the markup on these socks are quite good. By doing this, these businesses have increased their average ticket size.
Another great example is the Dollar Shave Club. For instance, you might visit their website expecting to spend a dollar, but you would quickly realize they have two pricier options. Of course, they use some marketing by calling the $1 option the “The Humble Twin” and their more expensive option is called “The Executive”.
4. Increase the Frequency of Transactions
When I started working with one of my clients, I calculated their average customer would visit them 2.5 times per year. I asked the question, “What would it do for your business if they visited 4 times per year?”. The obvious answer is it would increase revenue. So how does one go about doing that?
One way of doing this is rewarding customers. For instance, a basic, simple method is to give customers a punch card where after so many purchases or visits they get a reward. My children go to a school that requires a uniform and at the uniform supply store after spending $200, we get a free $15.
Another method is to anticipate customers needs. Technology is now being introduced that will make it much easier to anticipate a customer’s needs. For many online retailers, they already do this. For instance, when I sign into Amazon, they have recommended products based on my viewing history. For many small businesses with an e-commerce presence, this same software is readily available.
Lastly, I always think that implementing a loyalty program is great for so many reasons. First, a small business can start collecting more data about their customers which is incredibly valuable (read our blog on Big Data for Small Businesses). The statistics bear this out – 69% of customers say their purchasing decisions are influenced by where they can earn customer loyalty rewards. Most off the shelf loyalty systems have added benefits such as drip marketing campaigns and customer retention plans.
Putting it All Together for Growth
Odds are, no one of these four methods will increase revenue alone. If someone tells me they have a revenue growth goal of 10%, we usually come up with a strategy to meet that goal using a combination of the above strategies and tactics. The important thing is to have a plan…without a plan, you’re going to find yourself wondering between strategies and not tracking your performance.
About Krieger Analytics
This is where a true financial professional comes in. At Krieger Analytics, one of the ways we help our clients is by bringing clarity to their finances and partnering with them to grow revenue and profit. Contact us now to have a quick call to discuss your business. Why not contact us? Calls are always free with Krieger Analytics.