The other day, the head of a solar company approached me. Let’s call him Johnno. Johnno was grappling with improving his business profitability. He’d put a huge amount of money time and resources into his business. But it wasn’t translating across to the business’ bottom line. Even though he was an industry veteran, despite his best efforts, Johnno was left scratching his head about what to do.
Johnno felt his business had great potential. But his business wasn’t growing as fast as he sensed it could. He also wasn’t able to enjoy the fruits of his labours, and Johnno’s family was starting to ask if the business would perpetually monopolise his time.
When I heard his story, I immediately knew that parts of Johnno’s business that were doing much better than others. That’s a common story: businesses that aren’t doing at least one thing well don’t last long. Businesses that concentrate on what they excel in… they’re the businesses that inevitably grow in scale and profitability. But because so much effort goes towards trying to quickly fix what’s calling out for our immediate attention… most businesses become distracted from honing their energy on star performers.
Johnno’s challenge was there were so many moving parts in his business, it was impossible to figure out what to do. Johnno mentioned he was using OpenSolar software, so I asked if I could analyse the data in his OpenSolar account.
What I found blew me away. Johnno had some incredible success stories buried in his business under a pile of under-performing products, segments, and salespeople. If he could just concentrate on those segments and products, and on improving his salespeople’s performance, he could treble his profitability.
Johnno was blown away too. Because he’s driven by environmental motives too, he wanted other solar businesses to discover their hidden strengths too. So he permitted me to share his (anonymised) data.
So, let me take you on a journey towards profitability.
Is your business chasing the wrong segment?
Plenty of businesses have aspirations to sell commercial solar in large volume. Johnno’s business was one of them. But Johnno’s data showed his commercial sales were slowing down his business.
The chart below reveals that for every $2 in residential revenue, he was proposing $1 in revenue in the 30-100kW range.
This line of commercial business could have produced healthy profits, and historically it had delivered more profit for every Watt actually sold. But recently he’d trimmed his commercial margins
Unfortunately (and here’s the crux of the situation), he was simply not winning many commercial jobs in this size range. Historically only 7% of his 30-100kW proposals were converting, compared to 30% of his residential leads. But within the past 90 days he hadn’t converted a single lead into a customer in the 30-100kW size range.
(Keen eyes will note that his residential conversion rate had also slipped in the past 90 days, compared to its historical rate)
This led to a situation where despite its potential, his 30-100kW sales hadn’t delivered a cent. Indeed his 10-30kW sales his residential segment was delivering half of what it typically should have.
(The grey bars show the net profit from customer proposals sent in the past 90 days, the red lines show the profit actually realised from systems sold in the past 90 days, and the green lines show the profit that could be expected based upon the historical sales conversion rate).
Imagine the boost to Johnno's profitability!
Whatever Johnno did from here, he could improve profitability. One option would be to dump his commercial solar sales and focus on residential. Or he may try to adjust his commercial margin to convert more sales.
We then repeated the same analysis, for his salespeople and his products. This revealed some real under-performing salespeople and questionable product selections.
Your staff are only human (but one is superhuman!)
Your staff have skills and talents that vary from person to person, and from moment to moment. After all, they’re only human.
Wouldn’t it be great to know who’s just having an ‘off month’? Wouldn’t you like your most profitable salesperson to train the guy who sacrifices margin (profitability) to get a sale?
The charts below gave Johnno a revelation:
- Daryl Somers led his sales team in efficiency of work and profit delivered to the business. He didn’t contact as many customers as Tony Barber, but his conversion rate was far better – and had markedly improved in the last 90 days
- Tony Barber was having an ‘off quarter’. Even though he wasn’t typically as efficient as converting leads to sales as others, recently he was having difficulty closing the sale despite seeing more customers than anyone else.
- Red Symons needed to improve his performance, or face the boot. He wasn’t contacting people, and wasn’t converting even the few people that he got in contact with.
With this information Johnno had a chat with Tony Barber, who got re-motivated and back on his game. Daryl Somers trained the rest of the staff in the tricks of the trade, in the process improving everyone’s conversion rate.
Are your products letting you down?
Ah, we’ve all got our favourite products. The one that is technically great, that we buy off a top bloke who flings us all sorts of perks, and the one that we can sell at a premium.
Unfortunately, that’s not a great way to grow your business’ bottom line.
The charts below showed Johnno:
- He was proposing an equivalent amount of SMA&Astronergy, SMA&JA Solar, and SMA&LG.
- But he was converting almost 4x the rate on SMA&JA Solar than the other product combinations.
- This meant all his profit was coming from one product, and his efforts to sell the others were purely wasted breath.
- That said, historically, his business had a much better conversion rate on the other products – not quite as good as SMA&JA, but enough to keep selling.
Armed with this knowledge, Johnno engaged with his sales team to find out why the Astronergy and LG options were recently under-performing, and discovered that his LG brochure had been deleted from his proposal software. That one oversight had resulted in a lot less profit, but was easily corrected.
A deeper dive into Johnno’s product data revealed a costly mistake. He’d dropped his star performing product, in preference for the one that delivered him greatest revenue. But to show you that, first I need to introduce you to (possibly) a new concept.
Expected Profit: The Concept that Changes Everything
I need to introduce the concept of expected profit, because it’s going to change your life for the better. You can consider it as the profit you’re likely to make on every sales pitch.
An example is best: Let’s say you have a product that costs $1000, and lets say you have a 40% chance of winning the job if you sell it for $1100 (i.e. a 10% profit margin). But if you sell the same product for $2000 (i.e. 100% profit margin), you lets say have a 8% chance of winning the job.
What price should you sell the system at to maximise your bottom line?
For each pitch you make at $1100 you can expect to make only $40 profit (i.e. 40% of your $100). And for each pitch you make at $2000 you can expect to make $80 (i.e. 8% of your $1000 margin). You’d actually be better off selling at the higher price. And chances are there’s a sweet spot somewhere in between – say a 40% margin which you win 25% of jobs on, netting you $100 per pitch. You can see that maximising your expected profit delivers money and growth to your bottom line.
How to Maximise Your Expected Profit (and your bottom line)
Now we can apply the concept of expected profit to Johnno’s business.
The chart below shows that yet SMA and Astronergy (where you’ll recall you make most profit margin but don’t often win jobs with) has been where most of your bottom line has come from. That’s changed only recently, with your business doing better from SMA & JA Solar.
But Johnno had stopped selling SolaX&Opal, which was a costly oversight. That product combination was winning so many jobs, it was delivering double the profit per prospective customer than your current best option.
So, simply by bringing back SolaX and Opal (which incidentally his staff were big fans of), Johnno injected a massive amount of profit into his business.
What profit margin delivers most to your bottom line?
And that age old question of what profit margin should you apply. Naturally you’d think there’s two options: low-margin&high-volume or high-margin&low-volume. Or somewhere in between. But are there sweet-spots, that maximise your expected profit per prospective customer?
The chart below shows Johnno’s net profit margin is concentrated at 33%.
Naturally, if he reduces his profit margin, he reduces his profit per Watt (1). But because he dramatically increase his chance of winning (2), he is much likely to scale your business volume and profitability by shifting to lower margin (3).
Also, you can see that higher margins help rather than harm Johnno’s likelihood of winning, which means increasing his margin could increase actually increase the profit he can pull out of his business.
Get Benchmarked Today
There’s much more to cover – including how your prices, input costs, win rate, and profit margin compare against the rest of the market, which provides a handy benchmark to steer your business in a more profitable direction. And we can also reveal whether you’re paying too much for equipment
Think of how your business could benefit by focussing on the right market, with the right product and salespeople, bought at the best prices and sold at the profit-maximising price. All updated monthly to keep your ship sailing in the right direction.