If you zoom out and look at the big picture, the challenge of improving your bottom line optimization is simple – theoretically, at least. You can increase your revenue, you can lower your expenses, or you can do both. Now, actually accomplishing this is a different story.
The 2 Levers of Bottom Line Optimization
Top line growth is the first lever of bottom line optimization. And while it’s arguably the most exciting method, it’s also the most difficult to achieve.
“Top line growth means there has been an increase in the gross sales and revenue,” entrepreneur Mary Hart explains. “When you achieve top line growth, you’ve brought in more customers, or sold more to your existing customers, and have made more sales than the previous month or year.”
Bottom line growth is the second lever of bottom line optimization. This is usually easier to do, though there are limitations to how much you’re able to do.
As Hart puts it, “Bottom line growth means that you have decreased your operational costs and overhead in order to improve that number at the bottom of your P&L statement.”
In fact, the term “bottom-line growth” is really kind of an oxymoron. Bottom-line contraction might be a better way to phrase it, but that’s not the point. The point is that you can improve your bottom line by decreasing your expenses.
Most companies only focus on one level or the other. They become laser-focused on top-line growth, or they get caught up in bottom-line growth. But truth be told, the biggest gains happen when you target both simultaneously.
7 Ways to Optimize Your Bottom Line
As you think about improving your bottom line and increasing your profitability, there are hundreds of different steps you can take. But the key is to focus on the biggest needle-movers. You want to emphasize the actions that matter most.
With this in mind, here are several of our favorite tips:
1. Target the Right Customers
The Pareto Principle is one of those classic business fundamentals that we’re taught very early in our careers. And as frequently as people toss it around, it still holds true. And if you want to grow your revenue, you should apply this principle to your customer acquisition efforts.
The Pareto Principle says that 80 percent of your sales will come from just 20 percent of your customers. Take time to study your existing customer base and identify who these 20 percent are. Then focus all of your sales outreach, marketing, and messaging on chasing these individuals down. If your focus is on bringing in these customers, your revenue will grow faster than you could ever anticipate.
2. Raise Your Prices
This is going to sound really obvious, but why not raise your prices? We’re living in an era of inflation and it’s not uncommon for businesses to increase their prices. People might not like it, but they understand.
All it takes is a small increase and you could see significant revenue growth. If you sell 100 units of a product per day at $90, increasing your price to $93 per unit could take you from $270,000 in monthly revenue to $279,000. That’s another $108,000 in revenue per year (or 3.3 percent growth) as a result of changing a product’s price by a measly $3. That’s obviously a very conservative example, but it’s meant to show you how effective this can be.
Let’s look at a service example. If you have a SaaS subscription that you sell for $49 per month and you increase your prices to $59 per month by adding a simple new feature, you’re creating an extra $10 in monthly revenue. If you have 10,000 customers and they stick around for an average of 36 months before leaving, that amounts to an extra $3.5 million in revenue over a three-year period.
You’ll have to deal with some pushback on price increases, but it’s not usually as big of a deal as you anticipate. And if you want to be super safe, you can always grandfather-in your current customers and charge more for new customers.
3. Add Complementary Products
This is one of the biggest missed opportunities for businesses. Whether you sell physical products or services, you need to be on the lookout for complementary products you can sell to increase the average order size. Complementary products are everywhere. Here are some examples:
Movie theaters don’t just sell movie tickets. They also sell popcorn, candy, and drinks. Some even have arcades and party rooms that can be rented. On top of that, there’s movie-themed merchandise. You might even be able to pay extra to reserve a particular seat in the theater. These are all complementary products that drive up the average revenue per customer.
Golf courses don’t just sell rounds of golf. They also sell buckets of balls for the driving range, food in the clubhouse, and merchandise in the pro shop. These are complementary products.
Coffee shops don’t just sell coffee. They also sell pastry items, premium Wi-Fi, mugs, etc. Again, these are simple complementary products that they know a certain percentage of their target demographic will buy.
It’s not like every customer is going to buy your complementary products. However, if you can get 10 percent of people to spend 15 percent more each time they complete a transaction, that’s a net gain.
4. Pare Down Your Expenses
Bloated expense sheets are common. And the problem is, the bloat is always there, so we never notice that anything is wrong. But if you spend time carefully analyzing every line item on your expense sheet, you’ll see ways to save.
Small expense-saving tricks include getting rid of subscription services you no longer use; switching from paper-based processes to paperless processes; and outsourcing tasks that don’t require a full-time team member’s attention.
But then there are big expenses that have the ability to significantly change your bottom line. Office space is a great example. If this pandemic has shown us anything, it’s that typical commercial office space isn’t always necessary. By going 100 percent remote (or cutting your “in office” staff in half), you can save thousands of dollars per month in money that would be spent on expensive lease or mortgage payments.
5. Invest in Preventive Maintenance
Maintenance is something that most businesses address on an as-needed basis. (In other words, when the McFlurry machine inevitably breaks down at your local McDonald’s, the staff assesses the situation and then has it repaired.) The problem with reactive maintenance is that it leads to unnecessary downtime and increased expenses. By some estimates, reactive maintenance costs 3x to 9x more than preventive maintenance.
If you want to save money, you need to implement preventive maintenance strategies that address key problems and issues before they actually break. This reduces downtime, improves safety (in some cases), lowers costs, and aids in better efficiency. It’s a no-brainer.
Preventive maintenance is especially important when it comes to heavy machinery or vehicles. Fleet management is a great example. By proactively addressing key systems like brakes and rotors, tires, fluids, and belts, vehicles are able to run in tip-top shape. This reduces the likelihood of accidents, promotes better fuel efficiency, and allows the company to resell the inventory at a higher price when it comes time to swap vehicles.
6. Refinance Debt
Debt payments can represent a pretty substantial line item on your balance sheet. And while it doesn’t always make sense to pay down debt (particularly when you consider how inexpensive rates are at the moment), it may make sense to refinance.
Let’s say you have $1 million of debt-financed at 6.5 percent. By refinancing to a 5.5 percent rate, you could potentially save upwards of $1,500 per month. That’s a pretty sweet deal – especially when you consider it doesn’t require much effort or sacrifice.
7. Improve Employee Training
Finally, there’s your team. Employee training is admittedly not the most attractive topic. However, it’s something that could save you a tremendous amount of money in the long run. Not only does it allow you to get more out of your staff today, but it could significantly lower your long-term costs.
Research shows that hiring externally costs a company 18 percent more than hiring internally – and that’s just salary. When you add all of the recruitment and training costs that go into bringing in a new body, it’s more like a 25 percent premium.
By investing in better training, you’re able to cultivate your talent and help them climb the ladder. This results in cost savings and increased loyalty to the company.
Putting it All Together
When you stop focusing on either increasing revenues or lowering expenses, good things happen. Instead, the emphasis should be on how you can do both simultaneously. And as this article shows, there’s plenty of low-hanging fruit out there. It’s simply up to you to create a plan of attack. Consider this a gentle nudge to get started sooner rather than later!
*: Peter Daisyme is the co-founder of Palo Alto, California-based Hostt, specializing in helping businesses with hosting their website for free, for life. Previously he was the co-founder of Pixloo, a company that helped people sell their homes online, that was acquired in 2012.