How
many times have you been pushed out of a competitive situation because you didn’t feel you could compete on price?
There is no reason you can’t be competitive
at just about any price level and still make a handsome profit. Your standard
retail price for a county criminal search is probably in the $12-$15.00 range. Your average cost is probably around $5.00,
all depending on volume and how much work you do yourself vs. outsourcing to those all-important wholesalers.
Let’s
say you get into a competitive bid that drives the price down to a $7.00 level. Is
this still worthwhile? Well, sure it is.
Even if you can only make $2.00 on each search, why not make $2.00? Not
worth it, you say? Look deeper. You
can achieve much more than a $2.00 margin because the larger volume can get you lower costs.
You can turn what looks like a “puny” $2.00 profit/search into a healthy $14.00 profit/search.
What? I can sell it for $7.00 and earn $14.00 on each search??????
Yes!, when you have your own network of direct sources. And, let me emphasize, this is not the correct path for everyone.
But, by doing so, you can get your average data acquisition cost down under $2.00 per county (and that includes still
doing a lot of volume through a wholesaler). But you need volume to achieve or
even beat this $2.00 target.
Still confused? Look at the following example:
Lets
say you are doing 30,000 county criminal searches per year and selling half at $15.00 retail and the other half at $12.00.
With your $5.00 cost per search, your profit (actually your Gross Margin) for this piece of the business is $255,000.
Now you add a new client who generates 10,000 additional
county criminal searches a year, but to get this volume you have to cut your price to $7.00 each. Bad idea? Not hardly!
If you leverage the additional volume to obtain less expensive sourcing, your
gross margin per new search will, with only a $3.00 reduction in the average cost per search, jump to $14.00.
Huh? How can I get a gross margin
of $14 per search if I am selling the search for $7.00? Well, let’s take
a look:
Current Customer Base |
|
|
|
|
|
Clients |
Volume |
Retail |
Old Cost |
|
Profit/search |
Total profit |
|
A-M |
15000 |
$ 15.00 |
$ 5.00 |
|
$
10.00 |
$
150,000 |
|
N-W |
15000 |
$ 12.00 |
$ 5.00 |
|
$
7.00 |
$
105,000 |
|
|
|
|
|
|
|
|
|
|
Total
Profit from existing clients |
|
|
$
255,000 |
|
|
|
|
|
|
|
|
Add a New High Volume Client |
|
|
|
|
Clients |
Volume |
Retail |
|
New Cost |
Profit/search |
Total profit |
|
A-M |
15000 |
$ 15.00 |
|
$ 2.00 |
$
13.00 |
$
195,000 |
|
N-W |
15000 |
$ 12.00 |
|
$ 2.00 |
$
10.00 |
$ 150,000 |
|
|
Total
Profit from Old Customers at New Cost |
|
$
345,000 |
|
New |
10000 |
$ 7.00 |
|
$ 2.00 |
$
5.00 |
$
50,000 |
|
|
Total
Profit from All Customers at New Cost |
|
$
395,000 |
|
|
|
|
|
|
|
|
|
|
Incremental
Profit from all customers |
|
$
140,000 |
|
|
Value
per search from new customer |
|
$
14.00 |
So, because this incremental volume allowed you the leverage to get better costs,
your incremental profit attributable to this one new volume customer is $140,000 or an extra $14.00 earned for each of the
10,000 extra searches
The amazing power of volume. Sell a search for $7.00 and earn $14.00!
To obtain your free copy of this spreadsheet formula
so can put in your own numbers or to get more information on reducing your costs, call Bruce Berg at Berg Consulting Group,
561-712-1277.
Berg Consulting Group - Improve your business with creative thinking.
