August 14, 2015 Budgeting en_US Knowing your profit potential can be crucial to planning your small business' future. Learn the 5 questions you need to ask in determining your profit potential. 5 Steps to Estimate Your Profit Potential

5 Steps to Estimate Your Profit Potential

By Megan Sullivan August 14, 2015

One of the keys to a long-lasting business is sustainable profit. Attempting to quantify how much profit you can make in a given period, however, must take different factors into account, including your costs, overhead, industry trends and the market’s appetite for your offering.

That’s where profit potential comes in. Also known as “income potential,” your profit potential is the difference between the expected revenue of your products and the overall costs associated with making the product. For example, if you make widgets which sell for $10 each, and it costs $3 to build and $3 to market them, your profit potential is $4 for every widget you sell. Multiply that figure by the amount of widgets you expect to sell during a given period, and you’ll have a projected profit potential.

It’s important to remember, however, that this is a projection, not guaranteed income. Because there are many types of costs to account for (e.g. legal, utilities, overhead, materials, taxes, packaging, licensing fees, etc.), creating an accurate projected profit potential isn’t something that happens quickly. Also, don’t forget about the costs associated with unforeseen risks, including natural disasters (e.g. a fire that consumes your inventory) or extenuating circumstances (e.g. inordinate amount of customer returns).

If you’re trying to decide what to include in your profit potential projection, here are five questions to ask yourself. They’ll not only help you determine your product’s profit potential, but may also give you insight into the projected viability of your business moving forward.

1. What Does Long-Term Demand for My Product or Service Look Like?

One major factor that affects profit potential is how viable your products or services are for consumers in the long-term. If you’re selling something that can only be used in today’s market and has very little potential for growth, or you’re selling something to a very niche and stagnant audience, then chances are your long-term outlook doesn’t look good.

2. What Does the Competition Look Like?

This is especially important if you are entering an overly crowded field or a field with longevity. If you are the “new kid on the block,” competing against established businesses, then chances are that your road to profitability will be steep. Your profit potential would therefore decrease, depending on what type of market share you expect to take away from the competition. For example, if 10% of the population purchases your widget, you might want to project that you can manage to convert 1-2% of your competition’s purchasers.

3. What Type of Interest Exists for Your Product?

Take a look and see if people are willing to buy products similar to yours and where they buy them. Try searching Amazon or eBay to see if people have purchased products like yours. Do a quick search using your product keyword + free (i.e. “free widget”) and make sure that people are actually willing to pay for it. If a free version has flooded the market, then coming out with a paid one probably won’t generate a lot of revenue.

4. What Is the Lifetime Value of Your Customers?

This goes beyond the initial outlook for your sales and products. You want to examine the potential for your customers to grow with you and the opportunity for repeat business. Selling a product or service that will be useful to the same customer years down the road means that your profit potential will remain steady.

5. Can the Cost to Produce Your Product Be Lowered?

One of the best ways to increase your profit potential is to lower the cost to produce your product. This can be done by looking for—and exploiting—efficiencies in the manufacturing process, seeking out new vendors and decreasing fixed costs.

Figuring your profit potential is an essential step when conceiving your business plan and getting ready to launch your business. Investors will be much more likely to take notice and give you money if you can build a solid case for your long-term success.

For additional information on determining your business’ profitability read our article on conducting a profit-margin analysis.

Megan Sullivan

Megan Sullivan is a writer with experience in the advertising and digital media space. Read more