Mix Up Your Revenues for More Profits
Many small business owners focus on generating more revenue every year, and that’s a wonderful goal. But not all revenue is created equally, since some items are more profitable than others. If your business sells more than one product or service, you may benefit from looking at your revenue mix.
While it’s fun to watch revenues grow, your business profit is what really matters. If your expenses grow faster than your profits, you don’t get to keep as much of what you make.
An insightful exercise is examining your revenue mix. Then you can ask how to optimize your profits.
Your Revenue Mix
Let’s say you offer three different services: Services J, K, and L. Your revenue pie looks like this:
J: $700K or 70% of the total
K: $150K or 15% of the total
L: $150K or 15% of the total
Total: $1.0 million
In this example, Service J is clearly the service generating the most revenue for your business. But is it generating the most profits?
The profit you receive from each of these services is as follows:
K: $10K loss
While Service J is generating the most profit volume for your business, it’s actually Service L that’s the most profitable. Earning $80K on $700K yields an 11.4% return on Service J, but earning $30K on $150K yields nearly double the return at 20%. Service L generates the most return. And if possible, Service K may need to be discontinued since it’s creating a profit loss.
Your strategy for optimizing your revenue mix might be to sell as much of Service L as possible, while eliminating or fixing the problems with Service K.
But there are also more variables to consider besides profit:
- What services/products do you prefer to work on/sell?
- Are you able to sell more of your most profitable service, or are there marketing limitations?
- Is one service a loss leader for the others?
- Are you able to adjust pricing on the lower margin services to increase your profits?
These are just a few of the questions and strategies to consider as you work toward generating more revenue.
A New Mix
We hope you’ll spend some time analyzing your revenue mix and have fun dreaming about the ‘What Ifs.’ If we can help you expedite the process or add our perspective, please reach out and let us know how we can help!