I’m going to make you think today so have some paper and a pen handy to jot down some notes as you work through this article.
Let’s consider how an economic downturn could affect your bottom line. Perhaps the number of customers you have drops, let’s say your retention rate drops from 90% to 85%. And let’s say this translates in a reduction on your Net Profit from $376,000 to $316,000.
What can you do about this? Think of your own business now and write down what you can do to ensure your customers don’t go elsewhere so you retain as many customers as possible.
What happens if the number of leads or enquiries you get also drops? Let’s assume that there are 250 working days per year and instead of getting two enquiries a day, you’re now only getting one.
Let’s say this reduces to your profit further to $268,000. Thinking about your business again, what could you do to increase your leads or enquiries? Take a minute to write some ideas down.
It’s also become harder to convert those enquiries to a sale. Let’s say your conversion rate drops from 80% to 75%. Profit has now dropped to $265,000. Take a minute to write down some ideas of how to maximise the conversion of new enquiries.
So, the economic downturn has meant you’ve lost some of your existing customers, you’re getting fewer enquiries or leads and you’re converting less of these into actual sales. So far, you’re down $111,000 on your previous profit. And now that your customers are tightening their belts through the downturn, they’re buying from you less often. Maybe instead of six times per year, they drop down to five.
That’s only one transaction less per customer, per year, and your profit is now down to $87,500. So, what can you do to encourage customers to keep buying from you, or even increase the number of times they do? Write down some ideas.
When they do come in, they’re spending less. Instead of $100, they’re spending an average of $90 each time. This may be because they’re buying a cheaper line or fewer units, or maybe you’ve reduced your price to encourage them to come through the door. Whatever the reason, your profit has now turned into a loss of $1,250.
Not only are your customers affected by this downturn, so too are your suppliers. They’ve increased your buying price by 2% so your cost of sales (COS) is now 62%. This causes your loss to increase to $41,188!
It’s likely that your other expenses will also go up, but I think we’ve gone through enough to show how small changes can add up to a big loss during an economic downturn. It’s a scary thought, going from $376,000 to a loss of $41,188, but it can happen, so we need to prepare the best we can.
Hopefully, you’ve all written down ideas for how you can protect your business from the downturn. Next week, we’ll go through some ideas together now on how to turn this around.
