There is a huge misconception in business that the way to get higher profits is to market strongly, increase customer numbers and gain a greater market share. For years there has been a very strong message that the way to increase profits is to grab a larger slice of the market. As a result, this has filtered through to the small business managers who have aligned their businesses gain more customers and get a bigger market share.
This has created a situation where small business managers devote all their attention to gaining more customers, promoting your business to gain a large market share sometimes had a considerable cost. Regrettably, this is the wrong approach. There is enough evidence around the world to show that businesses who have learned how to direct their efforts into improving their revenue quality rather than selling greater volumes are much, much more profitable.
For many years now, the gurus have been urging small business managers to use a variety of strategies and techniques to increase their market share as a way of making more profit. Whenever a small business lets market share or sales volume guide their action then they will never reach their earnings potential. The evidence is clear. Firstly, focus on profit.
The logic is frighteningly simple. If your business produces 8% net profit from revenue increasing revenue is still going to produce 8% net profit. Unfortunately the cost of increasing revenue is normally out of proportion to the increased profit and this shows as a decrease in net profit as a percentage of turnover. The cost of acquiring new customers is six times more than the cost of increasing sales to existing customers. Where is the sense in this?
The obvious strategy is to increase the profit from existing activities to its highest level so that there are some options. Your efforts should be on increasing net profit rather than increasing market share because of the cost. Once you are making the maximum net profit from your existing customers, you are in a strong position. You can then use your judgement to work out the return on investment for increasing market share or broadening the customer base.
For the small business owner this is a no-brainer. Focus on making the maximum amount of profit before you even consider broadening your customer base or increasing your market share. The cost of increasing market share or broadening your customer base is much higher than most people believe. If they did the math they would soon see that making the maximum amount of profit is the smartest move.