The Number One Profit Building Strategy

How tiny gains can have a massive impact on Profit.

A yacht race is seldom won by simply having a faster boat or doing one thing really well. Yacht races are won by trimming the sails just right for the breeze at that moment, catching a wave to add a bit of speed and constantly moving your crew weight to suit the wind.

Meter by meter each one of these things buys you tiny little gains over your competitors. And when done right, they collectively help you win the race.

In this case, yacht racing serves as a bit of a metaphor for business, and in particular, the business of hospitality. – It’s the collection of a small number of improvements, which over time add up to a competitive edge.

We refer to this as the aggregation of marginal gains; a term made famous by British Cycling coach Dave Brailsford; and it relates entirely to my number one profit-building strategy.

Recognising the power of tiny gains, and applying this mindset to your business can have a massive impact on profit.

It can also turn the daunting and overwhelming task of improving your profitability into a far more manageable job. It all comes down to:

• Identifying what needs to be done.

• Focusing on one thing at a time.

• Locking in that small thing, and banking those small gains while you set to work on the next one.

Most hospitality businesses operate on a tiny margin; often between five and seven percent. –Sound familiar? Now imagine if you were able to double or even triple that margin?

It sounds too good to be true, but in most cases this miraculous profitability boost can be achieved by adopting a strategy focusing on the aggregation of marginal gains. –Let’s take a look at how that’s done.

How It Works

In this example, our hypothetical café operates seven days a week and has a turnover of $15,000 per week; or a $780,000 a year.

ts food costs are 35% of turnover, wage costs are 36% and operating expenses are 22%. This gives an operating profit of just 7%; or $54,600 per year.

While these ratios aren’t too bad, and are pretty typical of a lot of businesses, this café is suffering from a low turnover.  When turnover is low, even good cost and profit ratios can’t make the business viable; there’s simply not enough money flowing through to deliver a meaningful profit.

Improving Turnover

Increasing turnover is a great place to start. Not only does it add more money to the bottom line, but if you increase turnover by increasing your price, this higher turnover will also improve the food cost, wage cost and operating expense ratios.

In the case of our café, it would be very easy to increase turnover by just 5% (or $107 a day), by simply increasing the prices by 5%.

You can read about how to increase you prices by reading my ‘How to Increase Your Menu Prices’ post.

This small price increase would now mean that the café’s food costs are 33%. Wage costs would be 34% and operating expenses are 21%.

In addition to increasing your prices, there are loads of other ways to increase your turnover through things such as clever marketing, altering your service offering, and suggestive upselling; just to name a few.

Decreasing Food Costs

While increasing turnover is a great start, there’s no point in stopping there; this café should be doubling down on its profit gains by now focusing on reducing food costs.

The best way to do this is to look at your current food costs as a percentage of turnover, and then set yourself an achievable target, one or two percentage points below this.

You can then look for ways of achieving this target by calculating the true food cost of every item on your menu, then looking for ways of reducing this through things like portion sizes, reducing wastage or seeking better supplier pricing for high cost items.

Using our café as an example, reducing the food costs from 35% to 33% would save $15,600 per year.

Decreasing Wage Costs

Already we’ve been able to significantly increase the operating profitability of our café, but let’s keep on going by diving into wage costs.

Wage costs seem to sneak up on us. The actual cost of an employee goes up every year, and by and large there’s very little we can do about this. While our wage costs go up, our rosters often sneak up too and we quickly find our staffing levels are not as lean as we’d like them to be.  

As wages are one of the biggest costs to our businesses we need to make sure we are staffing them as efficiently as possible. This means running the kitchen lean; not utilising expensive staff to do jobs that could be done by cheaper staff, and keeping an eye on overtime.

Like food costs, the best way to reduce your wage costs is by setting yourself a target and working back from there.

In the case of our café, we’ve targeted an easy saving of just one man-hour per day. With an average wage cost of $21.00 per hour, this is a saving of $7,665 a year.

Reducing Expenses       

Operating expenses go up every year. Many of them, such as rent, are all but impossible to reduce, however, like staff rosters, expenses can build up a little fat over time.

Left unchecked; things like subscriptions, services and utilities can all sneak up. Often, these items can be cancelled if superfluous, or their costs reduced by shopping around.

In the case of our café, we’ve been able to easily reduce expenses by two percentage points saving $7,800 a year.

Bringing It All Together

Using our hypothetical café as an example, we can see how a number of small gains can be brought together to significantly improve performance and profitability.

We’ve been able to turn a moderate $54,600 into an operating profit of over $124,000; an increase of just over 128%.

IN SUMMARY . . .

The aggregation of marginal gains is my number one profit-building strategy.

It’s super simple and the compounding benefits of increasing turnover, while reducing costs, delivers exceptional results.

By now I’m sure you can see how you could apply my number one profit-building strategy to your business and what the benefits of such a profit increase would mean for you. Less pressure, more freedom and more time to spend doing the things you love. 

It’s well within reach; so go out and grab it!