Did you know there is another way for your business to make more money? Even with the same customers, same level of physical sales, same systems, and no extra staff or overhead costs? While many business owners think you need to increase sales substantially to make more money, that is often difficult in the short term. Instead, you can make more money by increasing your profit margins.
Your profit margin is a metric that should always be on your radar. It answers critical questions about your business, including whether or not you are making money and if you are pricing products or services correctly. This is not just something you should measure but continuously improve.
Today we are going to discuss the top 10 tips to increase profit margins.
1. Figure Out Your Gross Profit Margin
Your first step should be to know your up-to-date, overall gross profit margin. You cannot make good decisions based on estimated inventory figures or working from the figure in your latest annual financials. Ensure you are taking regular stock takes so you can analyse your last end-of-month and accurately calculate your gross margin. You should also get benchmarking figures from your accountant that you can compare to the industry average.
2. Analyse Profit Margins
However, your overall gross profit margin can be deceiving. You should find out the gross profit margin of each product and/or service. This then allows you to analyse your gross margins over different business divisions, product categories, and customer or supplier categories.
This then allows you to identify your low margin and/or loss making items, as well as profitable activities and/products. As a result, you can stop selling low margin lines, services and/or items, and focus on those that are working for your business.
3. Increase Prices
While it might be difficult, increasing prices is one of the best ways to increase profit margins for your business. This allows you to, obviously, make more money on each sale, widening your margins and improving your bottom line. Look into your own business, run the numbers, and figure out that price sweet spot.
It is also important to look at external factors, including competitor pricing, the state of the economy, as well as the price sensitivity of your customers. Consider what types of customers you want to attract – the shoppers who take their business elsewhere if they can get an item or service for less, or the customers who don’t base their purchases solely on price.
It is always surprising to find that the majority of customers and clients belong to the second category. As much as 55% of customers will actually pay more for better customer experiences. Take all of the above into consideration and test the increase on a few select products first to gauge reactions and sales. If this is positive, roll out the increase to all your stock or services.
4. Carefully Consider All Discounting
Unfortunately, discounting can be the death of many businesses as it can destroy your margins. If you must discount your products, you need to be smart about it. Discounting goes against all traditional advice on profitability, but it can work to your advantage if done right.
One way to discount without hurting your profit margin is to provide tailored offers. Not all customers think or buy the same way. Some don’t need a lot of convincing to buy, others need 20% or more to convert. So instead of a one size fits all offer, work out how big of a discount you need to convert each customer. Utilise your stocktake and accounting software, and accountant, to analyse customer behaviour and gather information on customer purchases, browsing history, etc. From there, you can convert customers in cost effective ways.
By personalising your offers, instead of utilising blanket offers, you can offer discounts and maximise your margins at the same time.
5. Compete in Other Ways, Not Just Price
Competitive pricing is not always the best way to improve profit margins. You can differentiate yourself in other ways such as giving superior value, going the extra mile for customers, or reducing other costs of doing business. You can also elevate your products or services by increasing the perceived value of what you offer. This can be done by creating a personal and emotional connection with your customers.
This involves brand management, working with customers at an emotional level, creating a sense of status and lifestyle. No matter your business size, stage of growth, or industry, you can focus on your unique branding position to differentiate you from your competitors and increase perceived value.
6. Identify and Eliminate Waste in Your Business
It is important to find and identify waste in your business. Eliminating waste saves you money and adds to your bottom line. There are eight types of waste that cost businesses money. These are:
- Defects – due to issues with quality control, poor handling, etc
- Overproduction – ordering or making more merchandise than needed
- Not utilising talent – not leveraging the skills or potential of your team
- Waiting – unplanned downtime, absences, etc
- Inventory excess – surplus, dead stock, etc
- Motion waste – unnecessary movement of staff
- Excess processing – processing, returning or repairing products that don’t meet needs
- Transportation – unnecessary movement of products such as unnecessary shipping
By going through each of these and seeing if they apply to your business, you can reduce or eliminate them and increase your bottom line.
7. Optimise Your Vendor Relationships
It is important to negotiate better contracts with your suppliers to reduce the cost of goods, to widen your margins. But you can also take things a step further by building a stronger relationship by working closely with your vendors.
Joint business planning with your vendors by engaging in joint business planning. This is a collaborative tool that helps you and your vendors agree on profit goals, as well as the initiatives needed to reach those profit goals. Both sides help each other to become profitable.
You should also study your supply chain to figure out where you have unnecessary costs. By reducing supply chain costs and inefficiencies, you can increase profit margins. For example, ensure full truckloads are shipped, rather than partials, to save on costs. You should also discuss with your vendors if there is a way to make products and shipments more cost-effective. By strengthening your working relationship with your vendors, you can work better together, identify ways to reduce product costs and operating expenses. This can help improve our workflow and productivity.
8. Streamline Operations and Reduce Operating Expenses
You need to focus on streamlining operations rather than pricing strategies, to increase profit margins. This can be done by cutting overtime and excess staff where possible, as well as focusing on areas of waste. You should be minimising supply and spending as little as possible – such as avoiding printed shopping bags or excess packaging.
You should use an efficient POS system to tie inventory, sales and marketing under one system. As a result, your store and staff will run more efficiently. You should also streamline operations by automating tasks where possible. These days there is generally an app for everything, which will help you cut down on man-power and data entry.
You don’t need to make drastic changes to your business to improve your bottom line. Working with your vendors and accountants, you can find a way to increase your profit margin through simple tweaking. Contact the team at Siragusa today for financial advice to help support your business.