How to improve your profit margin

Growing your business could be achieved by growing profit rather than sales.

First, increase prices

Often increases in prices by a very small percentage (even 1- 5%) on regular occasions is easier to implement, than hitting your customers with a larger price increase once a year.

Price sensitivity

If you have a price-sensitive customer (they will possibly switch providers with even a small price increase) then consider the impact of losing them as a customer, over the increased profit you’ll make from the remaining customers. It could be you end up doing less work for the same profit (which is still an improvement).

There will always be a threshold where customers will switch for a lower price regardless of how great your business is, especially for products and services where customers have a fair idea of the cost.

If you do sell items where customers are more price-conscious, consider keeping your major products or services at competitive prices. Instead, think about increasing margins on supplementary products or services where customers are either not so familiar with the price or don’t compare you with the competition.

Second, lower the cost of supply

The other main way you can improve your margins is by lowering the cost of supply, finding ways to pay less for any of the costs associated with bringing your products or services to consumers.

To achieve lower costs, consider:

  • Sourcing raw materials from a less expensive supplier, if they offer the same quality. It’s easy to fall into a routine and always order from the same supplier. Consider every year (or two) to re-tender or seek new quotes from suppliers.
  • Purchasing in bulk if discounts are available, you have the storage space, and you don’t stock perishables.
  • Importing – if your business can get similar raw materials or products from overseas at less cost, it’s worth looking into.
  • Ensuring you take advantage of any early payment or cash payment discounts.
  • Taking steps to reduce theft and waste – make sure your inventory system is efficient and links through to sales and there is less room for fraud.

Third, focus on larger margins

Concentrate on the products or services you sell that have the biggest margins – by selling more of these items, your business will gain more profit. Train your employees to be aware of which items have the best margin and are therefore best to sell.

Likewise, begin to phase out goods that have low margins. If you’re selling plenty of them but not making much profit, it might be best to use that space or time for something more profitable.

Other options for focusing on larger margins include:

  • Changing your product or service mix and give customers more choice to buy high margin items, and less choice on low margins.
  • Promoting items with the highest margins above those that have low margins.

Remember the 80/20 rule outlines that 80% of your profits comes from 20% of your goods or services. Make sure they are the high margin products.

Finally, try these ideas

Target better clients

Change the customers you are targeting to ones who will spend more money, or who are less price resistant. They may be quite happy to pay a higher price for what you offer.

Consider only doing business with those customers that pay on time, or in cash, or don’t always want a discount. By not having to wait for your money you will enjoy higher margins by either paying less interest on any financing or receiving interest on spare cash.

Are there any clients that cost less to service (such as closer to your location, or don’t require ongoing support)? Having more of these customers will lower your overall costs, and therefore increase your margins.

Attract new clients

You could open new locations or target new regions where customers are willing to pay a higher price. If you focus on local consumers who are price sensitive, can you find commercial or government customers who may be prepared to pay more for what you do?

Use the power of social media and online presence to attract more customers.

Encourage customers to buy more – and to buy more frequently

If your loyal customers increase the amount they spend at your business and the frequency of their visits, your profits will increase accordingly. Encourage your customers to spend more by:

  • Stocking a wider range of products (with decent profit margins) and introducing complementary services.
  • Setting up a loyalty program that rewards them for frequent visits.
  • Upselling and cross-selling.
  • Setting up a subscription service where customers automatically receive a repeat order every 4, 8 or 9 weeks.

Review how you work

Some businesses are able to reduce their fixed overhead such as salaried staff, with part-time or contracted workers. In addition:

  • Assess if any staff can work from home, possibly lowering any lease costs as you’d need less room to operate.
  • It could be possible to subcontract any nonessential manufacturing to other businesses, to save you holding fixed costs or raw materials.
  • The world is increasingly a global marketplace. What else can you source cheaper than your current supplier? This could be service tasks such as accounting services, subscriptions, and training.
  • Coworking or shared working areas allow growing businesses to operate without the full overhead cost of office space.

Make your processes more efficient

Look at all your business’s processes and brainstorm ways of making them more efficient in order to save money. You could, for example:

  • Cut your raw material costs by reducing waste.
  • Increase production line productivity by introducing lean manufacturing techniques.
  • Reduce the amount of money spent on stock by implementing just-in-time ordering.

Summary

Getting higher margins removes some pressure from sales because it means you can sell fewer products and services, or the same amount, and usually return a higher profit. Get in the regular habit of reviewing your margins to make sure they haven’t changed due to creeping input costs or sales discounts. Repeat these strategies often to keep enjoying healthy margins in your business.

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Contact a Business Banking Specialist at 877-997-9957

Disclaimer

For informational purposes only. There is NO WARRANTY, expressed or implied, for the accuracy of this information or its applicability to your financial situation. Please consult your financial and/or tax advisor. Full legal disclaimer