The Mathematical Formula For Making Money
No matter what markets you serve; what products you sell; or what marketing tools you use, in business there's one truth you cannot escape.
Embrace this truth and profits will flood your business.
Disregard this truth and financial-cancer will eat you.
What is this truth?
Quite simply, the size and speed of your entrepreneurial success is directly proportional to your understanding of The Mathematical Formula For Making Money.
Despite serving as the corner stone of every single commercial success since the dawn of commerce most businesses neglect its power. Being so familiar with the diluted version of the formula these businesses overlook the enormous profit-potential held within.
Mindful of this blind-spot, let's now take a close look at the Mathematical Formula For Making Money:
Leads x Conversion Rate = Customers
Customers x Average Dollar Sale x Sales Per Customer = Gross Profits
Gross Profits x Profit Margin = Net Profits
Please pay close attention to what I am about to tell you: your number of customers; your gross profits; and your net profits are the least important figures in this formula.
Because they merely represent outcomes. They tell you how good or bad you're doing without telling you why. And without knowing why you're doing so well (or so bad) you are in no position to fix the cause with speed and accuracy. All you can do is guess and implement random strategies in the hope that one day your results will improve.
The real power of this formula is stored within the five highlighted variables (a.k.a. levers).
A Demonstration Of Power
Quite literally, when you apply these levers to your business your profits will increase exponentially.
Allow me to demonstrate.
Assume for the moment that your business currently operates under these circumstances:
Leads Per Annum = 10,000
Plugging these into the formula gives you a net profit of $20,000 per annum.
Let's now demonstrate the impact of improving progressively more levers without increasing your overall effort:
Case #1: Improve leads by 100%
Net profit = $40,000
I.e. for every % increase in effort you get the same % increase in profit.
Case #2: Improve leads and conversion rate by 50% each.
Net profit = $45,000
I.e. for every % increase in effort you get a 1.25% increase in profit.
Case #3: Improve your leads, conversion rate and average dollar sale by 33% each.
Net profit = $47,052
I.e. for every % increase in effort you get a 1.35% increase in profit.
Case#4: Improve all levers except profit margin by 25% each.
Net profit = $48,828
I.e. for every % increase in effort you a 1.44% increase in profit.
Case #5: Improve all five levers by 20% each.
Net profit = $49,766
I.e. for every % increase in effort you get a 1.49% increase in profit.
Observation: By simply increasing the number of levers you improve you magnify your leverage. In other words, for the same amount of effort, the more levers you improve the more your profits improve.
In this example we see that by spreading your effort over all five levers you increased your net profits by $29,766. Compared to the $20,000 increase gained from improving only one variable we see that your profit growth is almost 50% greater for doing nothing more than spreading your resources over all five levers. Imagine all the extra money you could be generating right now without any extra effort. All it takes is a simple change in focus.
Conclusion: To leverage your efforts for maximum returns you must focus on improving all five levers in your business.
An Even More Powerful Demonstration
Next, let's demonstrate the impact of improving all five variables by progressively larger amounts:
Case #1: Improve all 5 levers by 10% each.
Net profit = $32,210
N.B. Here's how to work out the Profit to Effort ratio. First of all work out the % increase in profit. This is derived by taking the original profit of $20,000 away from the new Net Profit and dividing the result by $20,000. In this instance our $12,210 increase in profit represents a 61% growth. Next, determine the relative effort by simply adding the % increases in each lever. In this example our relative effort is 50% (i.e. 5 x 10%). Finally, divide the % increase in profit by the % relative effort and you'll have the Profit to Effort ratio.
Case #2: Improve all 5 levers by 25% each.
Net profit = $61,035
Case #3: Improve all five levers by 50% each.
Net profit = $151,875
Case #4: Improve all 5 levers by 100% each.
Net profit = $640,000
Observation: As you continue to improve all five levers the magnification factor on your net profit increases at an exponential rate.
In this example we see that when we doubled our effort from case #2 to case #3 our leverage increased by 61% (i.e. ((2.64 - 1.64) ÷ 1.64) x 100). But when we doubled our efforts once more from Case #3 to case #4 our leverage increased by 135%
This has to be one of the most magnificent realisations you could ever make in business.
Conclusion: Never stop improving all five levers of your business.
A Tragic Habit - And How To Fix It
Clearly these two examples demonstrate the power of leveraging all five variables in your business.
Tragically, most businesses seem to care about only one of these levers - the number of leads. To make matters worse, of all the levers this one will cost you the most to improve!
So if you're stuck in the 'drive-more-traffic-to-my-business' trap - STOP! Instead, harness the multiplying power of all five levers and you'll find that your profit to effort ratio will skyrocket.
Or to put it another way, by applying all five levers to your business (instead of only one) you will make more money with less effort.
Right about now you may be thinking to yourself, "That's all well and good in theory but how could I possibly increase all five levers by such large amounts?"
Although there are over 200 ways to amplify these levers space restrictions preclude me from discussing the how-to's here. What's important for now is that you understand the magnifying potential stored within this formula. With this understanding achieving a 100%, a 200% or even a 1000% increase in profit is well within your grasp.
This article was posted on January 24, 2003
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