The bank notified Michelle that she had insufficient funds for her last check that she had sent the credit card company. She decided to once again pay the minimum balance on her credit card so that she would have some money in her checking account. Michelle knew that she could always borrow money from her husband to get her checking account balance up; but she didn’t want to do that again. She didn’t want to face her husband’s criticism about her business one more time. But she also didn’t want to keep losing money in her business.
Michelle started a business from her hobby of creating custom masks. Michelle made custom masks that were used as wall hangings. At first, she just liked creating these artistic masks. Then she started giving them as gifts. Her friends and family kept referring their friends to Michelle, and so she started charging for her masks. She charged double what it cost her to make them, and she was still losing money. It didn’t make sense. If she increased her prices, sales would plummet; and there seemed to way to cut costs. How on earth could she make money in her new-found business?
She knew she needed help, but how could she pay a consultant when she couldn’t even pay off her business credit card? Michelle decided to talk to her husband to get one last bit of money to hire a business coach. She saw that Coach Russ was offering some an introductory coaching package that included four 1-hour sessions for $500. He claimed that he could double your profits by the end of the five sessions. If Michelle could double her profits, she would be able to pay off her credit cards and possibly invest in growing her mask business. Michelle’s husband willingly gave her the $500 she needed. He said that it this didn’t help her, she would need to think about gong back to hobby mask making instead of draining their savings.
The first session was over the phone. Coach Russ asked Michelle some basic stuff about revenues, profits and how she was currently marketing her business. Michelle was only getting $500 per month of revenue as she could only sell 20 of her $25 masks each month. She indicated that it only cost her $13 for materials for the masks, but that shipping charges and a lot of expenses made her company a loser.
After they discussed the basic vital signs of the business, Russ explained how he could help Michelle with her business, “I’ve created a simple formula to help startup businesses gain enough clients and improve their prices to become profitably relatively quickly. I call it my ‘5-Steps to Business Success’. It is based on: 1) numbers of leads; 2) conversion rate of those leads; 3) number of transactions per conversion; 4) price per transaction; and 5) profitability.”
Michelle was somewhat interested, but also disappointed, “I am interested to learn more, but I think I am doing as good as I can at all of these things. What if people just don’t want to buy my masks?”
“That would be a problem. However, I think you have already demonstrated that at least 20 people a month do like your masks and are making purchases. Let me show you how the math works on my formula. You are currently getting about 30-leads per month. Of those 30 leads you are converting 20 into paying customers. Since you are selling your masks for $25 for each mask, you are getting $500 of revenue. Your gross profit on this $500 is $250 or 50%. Unfortunately, this profit is insufficient to pay for some of your small expenses.”
“I know. That’s just information I told you.”
“Right you are. Now, what if I can show you how to increase each one of these five aspects of your business by only 10%?”
“I suppose I will get $550 per month in revenue as my income will increase by 10%.”
“That’s a good guess, but your revenue will actually increase quite a bit more. If you increase your leads by 10% to 33 leads; then increase your conversion rate to 70%, you would have 23 customers, right?”
“I guess so.”
“Then, if you can increase the numbers of transactions by 10%, you will have 25 effective transactions. And if you then increase your price by 10% to $27.50, you will have $687.50 per month in revenue, right?”
“Since you currently have a 50% gross margin, you would normally make only $344 on that $688 in revenue. But, if we can improve that profit margin by 10%, you will make $378 on that revenue, right?”
“You’re right. I think I see what is happening. I can increase my monthly profits by over 50%, if I can increase each part of your formula by 10%. right?”
“You got it, Michelle. Our session for today has come to an end. I want you to think about how you can improve each area of your business, and be ready to talk about your findings in our session next week.”
Michelle seemed disappointed once again, “Coach Russ, I thought you would teach me how to increase my profits. Why is a rookie like me coming up with these ideas?”
“First of all, you’re no rookie. Second of all, I want you to put your mind to work to develop confidence in your own abilities to improve your business. If you come up empty, I’ll help you along next week.”
Michelle decided she would try to do as Coach Russ said. She currently relied on referrals, word of mouth and Facebook to generate leads. She thought that she could improve leads using Instagram to show pictures of her masks. Michelle already had a high conversion rate. She was not quite sure how she could improve her 67% conversion rate to 70%. She then considered transaction amounts. What if she offered two masks for a discounted price of $45 instead of $50? Then she got stuck at prices. She couldn’t just increase prices. If she did, then she would lose the customers she just gained. She didn’t want to do anything with her prices. Then it came to profits. If she ordered more mask blanks she would be able to save 5% on her product costs. But this would mean that her credit card balance would go up. Michelle didn’t see how she could effectively cut her costs without driving her credit card balance up.
It was time for session number two. Coach Russ asked Michelle what she came up with and she shared her list with him.
Coach Russ congratulated Michelle on her efforts and said that she had done quite well with her homework. Michelle would start an Instagram account this coming week and try to create a following on her masks. Michelle would also offer discounts for bigger orders. Coach Russ and Michelle agreed that she would make much more money by offering bulk discounts as her overhead on larger orders was much smaller. Therefore, Michelle would create a sliding scale for orders all the way up to 100-masks.
Coach Russ asked, “Why did you not do anything to increase your conversion rate?”
Michelle responded, “Are you kidding? I have a conversion rate of 67%. How can I do better than that?”
“How often do you contact people who didn’t buy from you?”
“Why would I contact people who don’t want my stuff?”
“Usually, when a prospective client says no, the timing may not be right for them; or they felt the price was a little higher than they wanted; or something else. But in most cases these people who said no are still interested. What would happen if you sent them an email to ask them if they have possibly reconsidered?”
“I don’t know. Isn’t that just annoying?”
“It’s your business and your call. If you are annoying them, they will probably tell you. However, some may be grateful you reminded them and may make a purchase. What do you say?”
“I guess it couldn’t hurt.”
“Awesome. I think you have your hands full for this next week. I want you to make the changes we talked about, and we will start working on the other areas next week.”
Michelle was amazed at how many leads she picked up after she started her Instagram account. She found out that many of her Facebook friends started following her right away; and started sharing her posts on Instagram even when they didn’t share the same posts on Facebook. Within a week she got three new leads. She was also amazed that two customers responded to her follow up email telling her they had changed their mind and were interested in giving her masks a second look. There were no takers on her new, improved large volume pricing. The five additional leads were definitely progress.
Michelle was excited to share her success stories with Coach Russ on their third session. Russ indicated that he was glad he bulk pricing was not yet a success as they needed to talk about pricing today.
Michelle shared her fear, “I don’t think I can raise prices. Even some of the people who wouldn’t buy from me in the past said that $25 was way too expensive for a mask.”
Russ said, “Pricing is a tricky thing. As you increase prices, some prospects will not buy from you, but others may be more attracted to your product at a higher price because they feel it may be higher quality.”
“What? What about supply and demand in economics? I thought that demand will always go down as you increase price?”
“On a macro-economic basis, supply and demand are certainly at work; however, business pricing on a micro-economic basis is quite different. You won’t know your prices are too high until you increase your price and you lose customers.”
“But I told you that I have had customers who wouldn’t buy at $25 per mask. That must mean my prices are as high as they can go, Maybe my prices are too high.”
“Not necessarily. Just because one or two customers won’t buy at your current price, you may pick up more customers at a higher price.”
“Really? I don’t believe it. What if I ask my current customers what they think of my price?”
“When given an option, all customers will not want to pay more than they have already paid for a given product. I recommend you try a little experiment. Try to increase the price of your single mask to $30. Then decrease the price if your customers buy more than one mask. You can even drop your price to $20 per mask, if they purchase 100 masks.”
Michelle paused for a while, “Okay. I’ll try this new price for a month. But, if I lose customers, I’ll drop my prices right away.”
“That’s all I can ask. Our session is up for today. I would like to wait a month before we have our fourth session to give these changes a chance to work. Is that okay with you?”
“Sure. Talk to you in a month.”
It was an interesting month. Michelle picked up even more leads through Instagram Her bulk pricing also paid off. Michelle received an order of 50-masks for their local college who wanted logo masks for their football champions. They thought it would be a classy and unique gift for players, cheerleaders and coaches. They even got the bulk ordering price of $23 per mask. Michelle was mostly surprised about her price increases. She was convinced that she would harm sales by increasing her price from $25 to $30 per mask. She did get a few people tell her that they decided not to buy from the higher prices; but she had even more people buy. Her conversion rate went from 67% to 75%, so price as obviously not a deterrent.
Michelle decided to do some math before her fourth session with Coach Russ. With the big bulk order and the increased leads and conversions, Michelle’s mask business had $2,000 in revenue. Within a month, she had quadrupled her revenue.
Michelle started the fourth session with gratitude,”I can’t believe how much you’ve helped my business, Russ. I am so grateful for all you have done in just three coaching sessions.”
Russ’s reaction was somewhat unexpected, “Michelle, you’ve done all of the work. You need to congratulate yourself. I have merely helped you question some beliefs that had been holding you back. You decided to try out Instagram, you come up with a bulk-pricing idea; and you followed up with previous prospects who said no; and you ultimately decided to increase your prices.”
Michelle smiled, “Then why am I paying you?”
“Because without me, you wouldn’t have seen these things that were holding you back. We all have limitations; and we never see them until a professional points them out. Do you think I have earned my pay for the last month?”
“Of course you have. Now that I have made such progress, can you help me improve my business even more?”
“Of course I can. You are doing much better and can probably start paying down your credit card bills; but I’m guessing you have higher aspirations for your mask business than making $2,000 per month. Right?”
“I do, but how can I increase my monthly revenue future? Haven’t we really done all we can with your 5-Steps to Business Success?”
Russ smiled, “We have only just begun. You want to make sure that you invest time on the items we’ve started; and then continue to work on improving each of these five variables. If you focus on only these five things in your business, you will continue to grow as larges as you hope your business could be.”
“I’d like to continue my growth. Would you be willing to help me?”
“I’d be glad to help. The normal cost of my services is $300 per month for one coaching session per month. What do you say?”
“There’s no way I would have done this at my prior size, but I have a good feeling, my mask business won’t be small for long. I’m in.”
As a business coach, I help my business owner clients change their mindset in a way that allows them the freedom and profitability they have always hoped for, but never thought possible. I write weekly blog posts just like this one; and am developing a robust online training system for business owners. If you want to stay up to date with all of the cool stuff that is going on at Jeff Schuster Business Coaching and receive two awesome business coaching tools, sign up here.
Note from the Author
My name is Jeff Schuster. I am a certified Life and Business Coach serving small business owners, corporate executives and others who want to transition from “expert” to “entrepreneur”. I have been a small business owner for most of my 30-years in the workplace. I grew an energy efficiency and renewable energy engineering and construction company from nothing to over $10-million/year and sold it in 2013. I now help other business owners make amazing progress toward their own dreams of business ownership independence and success.