On this week's episode of CNBC's "The Profit," airing Tuesday at 10 p.m. ET, three college-friends-turned-business-partners nearly lose it all as the result of a few common mistakes.
Chris Currier, Tony Anasenes and Jess Bell of Windward Boardshop, an iconic Chicago snowboard and skateboard shop, bought the company in 2010 with $200,000. Sales at the store were booming, until a quick decision to open a second shop started draining their cash flow.
Turnaround king and "Profit" host Marcus Lemonis offers to help the floundering operation by making a $500,000 investment for a 50 percent equity stake in the business — provided the co-founders agree to follow his guidance.
Here are two key strategies he used to get the company back on the path to success:
1) Boost the customer base
Among dedicated skaters and snowboarders in the area, Windward was known as the place to go.
Its high-end skateboards, helmets and snowboards, as well as other gear priced at hundreds or thousands of dollars, appealed to serious athletes. But for other potential customers, the merchandise was too expensive and too specific.
"The product offering is so narrow and the price points are so high that very few customers can fit through that door," says Lemonis. "We don't want to lose those core customers, but we also want to find new customers who are interested in active sports."
Lemonis offered the team an incentive to liquidate their problem inventory in one month.
Now free of inventory that had been weighing them down, the team focused on expanding their product offerings to attract more potential customers, a strategy Lemonis said would dramatically boost their sales.
While the co-owners initially worried about alienating their core customer base, they ultimately agreed to Lemonis' strategy to offer more products that would attract not just experienced athletes, but novices too. The store expanded its offerings to include athletic shoes, low-cost hiking gear and drones — products that would appeal to children and parents.
Within a few days, more families with kids, teenagers and adult beginner athletes started coming through the shop's doors.
2) Focus on your profit margin
In an effort to get out of the red, the shop's owners had been staging lavish product demos, including one where Currier demonstrated how to use high-end paddle boards in an indoor pool.
While the setup was impressive, the costs to stage it were much bigger than any revenue generated by paddle board sales. Lemonis called the demo the "worst product display" he'd ever seen.
Instead of pouring money into marketing ploys, or featuring expensive products with poor margins, Lemonis proposed a new strategy: Focus on selling products that yield at least 40 or 50 percent margin.
The shop's owners started with their winter boot inventory, a group of products that weren't selling quickly and only yielded a 30 percent margin, forcing the owners to heavily discount prices. That strategy wasn't sustainable, Lemonis said.
"When your product offering is as narrow as Windward's is, the pool of people that actually want to buy it is too small," Lemonis said. "So the more you discount, it doesn't make the audience bigger, it just makes the profits smaller."
The shop owners agreed to elimate the boots and other products that didn't yield enough profit.
As Currier, Anasenes and Bell made these adjustments, sales started to grow. After seeing how much better they were at managing the business, Lemonis agreed to lower his stake from 50 percent to 40 percent, yielding more control to the three partners.
"This is the biggest transformation that I've ever done to any business, ever," Lemonis said.
