Making a Difference

A few years ago, when the British cycling teams (both indoor and on the road) started to dominate the world cycling scene, much of their success was attributed to their intense focus on ‘marginal gains’ – dissecting every element of their process.

We heard not just about the focus on mental strength (and by the way I do recommend ‘The Chimp Paradox’ as a book worth reading) but also the focus on the clothing, the helmet, the tyres, the start, the finish etc. It was the sum of the parts that defined the winning formula.

That same thought process is also described in ‘Will it make the boat go faster’, a book focussed on how the British team came to dominate the world of rowing.

The thinking behind marginal gains can equally be applied in the world of business.

Let me explain.

Every business has its own unique funnel. At the top of the funnel are ‘enquiries’, and at the bottom we have net profit. Here’s an example of what a funnel might look like:

This business gets 10,000 enquiries (let’s say per month), they convert 10% of them giving them 1,000 buyers. Each buyer on average buys 2 items, so that’s 2,000 sales for the month.

The average sale value is £100 which means that sales for the month are £200,000, and with a gross profit margin of 30%, gross profit comes out at £60,000.

Overheads are £20,000 which leaves a net profit of £40,000.

Still with me?

Good! So, let’s apply the theory of marginal gains to our funnel and let’s see what happens.

Let’s apply a 10% improvement to each of the numbers in the yellow boxes. Here’s the result:

(Overheads are a cost so they’re 10% lower to reflect the improvement)

By applying a 10% marginal gain in just 6 key areas, Net Profit rises by £38,631, an increase of 96.6%!!

Putting it another way, by achieving a 10% improvement in 6 key areas you can double your bottom line.

Thinking about your business, do you know what your funnel looks like and are you regularly tracking the numbers?

As Peter Drucker said, “if you’re not measuring it, you’re not managing it!”

Turning to the 6 ‘variables’, it’s usually a good idea to involve the team in brainstorming ideas to get the 10% improvements in 3 of them – the enquiries, conversion rate and number of purchases. These are generally areas where, not only can everyone make a useful contribution but there’ll be some cracking ideas.  Here’s just a few examples of possible routes to improvement:

When it comes to the average value of purchases, we need to involve the pricing team. How are prices being set and is there scope to make increases (paying due regard to the competitive environment in which you operate)?

Getting an improvement in the gross profit margin needs to involve the buying department. Can we reduce the prices we pay? Are there economies of scale?

Finally, we need to involve the finance department. How well are overheads being managed? I think it was Richard Branson who said that he learned a heck of a lot about his business by instructing his team that for 1 week all payments had to be authorised by him alone. Sometimes you need to get into the detail to implement the strategy!

So, there we have it my friends. If you want to significantly improve your bottom line, focus your efforts on 6 key areas – and, doing what the cyclists and rowers do, marginal gains will deliver winning results.

As for the Lycra – that’s optional!