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Improving your profit margin

If your sales have taken a downturn, it could be a good idea to work on improving your profit margin until business recovers. This is the time to dig into the detail to see what makes your business profitable and what actions you might be able to take to make more money from the sales you have.

First, increase prices

Here are three tactics you could try.

1. Review your pricing

One of the best ways to improve your margin is to increase your prices, as the extra dollars flow straight to the bottom line without any additional costs or work. This may not be as hard as it sounds, especially if you have items with low price sensitivity where customers don’t mind as much if prices rise, within reason. Keep in mind to price for the market you serve to ensure this is the right strategy for your particular business.

You do of course need to weigh up the benefit of a price increase with upsetting existing customers who feel an increase isn’t justified, or the possible loss of a customer who thinks you’re too expensive.

Price increases don’t always need to be large to make a positive contribution to your bottom line either, as even slight changes could have a big impact on profit. You could use your sales data within your accounting software or sales systems to establish which products and services sell the best and then review your pricing strategy to help decide if they could handle a price increase.

Ways you might review your pricing strategy could include:

  • Comparing your prices against competitors to see what you could increase
  • Identifying products where you have exclusive rights so you can charge a premium
  • Contacting customers to determine if raising prices is possible
  • Accessing any business metrics or competitor pricing trends.

2. Lower the cost of supply

Another way to increase your profit margin is by lowering what you pay other businesses for raw materials, inventory, or any component of what you sell. There may be a number of your suppliers that are willing to re-negotiate your terms of trade or costs to help reduce what you pay.

You could Identify your top five supplier expenses and determine if you could:

  • Negotiate lower prices
  • Take advantage of discounts through buying in bulk
  • Receive a discount for early payment, or instead establish if you can pay later
  • Minimise any waste from production
  • Take steps to reduce theft
  • Incentivise staff to find ways to reduce costs.

It can also be a good idea to identify efficiencies, such as speeding up output, introducing lean techniques and tightening slippage from products being stolen, broken, or returned. Doing this could help lower the cost of production and therefore increase your margin.

3. Sell more high-margin products

Concentrating on promoting and selling the products and services that have the largest individual margins in your business could improve sales and improve your overall margin. Similarly you could begin to phase out anything with a low margin or switch to something more profitable.

Other options for helping sell higher margin products might include:

  • Introducing new products and services that have higher margins
  • Profiling items with the highest margins
  • Developing premium products or services
  • Train staff to cross-sell and up-sell
  • Target higher paying customers
  • Target less price sensitive customers who are used to paying more

Combining all three of these tactics can help improve your profit margin, as the impact of small changes can snowball when used together. From negotiating better terms with suppliers to nurturing your most valuable customers, you should be rewarded with increased profitability and steadier cashflow to help make your business more resilient during the tough times.

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.

Download PDF - How to Improve Your Profit Margin

Contact us

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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

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