Improving your profit margin
Increasing sales might make more profit for your business. You could open new locations or target new regions or spend time on selling more to your existing customers.
But if there is a limit to how much extra you can sell, it’s time to make more money from the customers you already have.
First, increase prices
Often increases in prices by a very small percentage (even 1- 5%) on regular occasions are easier to implement than hitting your customers with a larger price increase once a year.
If you have a price-sensitive customer (they will possibly switch providers with even a small price increase) then possibly it’s ok to lose them as a customer. Those who stay and pay slightly more may see you doing less work but for the same overall profit.
If you do sell items where customers are more price-conscious, keep your major products or services at competitive prices and increase your 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 and 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 wastage and 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 and 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.
Other options for focusing on larger margins include:
- Changing your product or service mix and gives 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 come from 20% of your goods or services. Make sure they are high-margin products.
Fourth, 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 those 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.
Fifth, review how you work
Some businesses can reduce their fixed overheads such as salaried staff, with part-time or contracted workers without any loss of service, quality, or output. 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 sub-contract any non-essential 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.
Look at all your business’s processes and brainstorm ways of making them more efficient to save money. You could, for example:
- Cut your raw material costs by reducing wastage
- Increase production line productivity by introducing lean manufacturing techniques.
- Reduce the amount of money spent on a stock by implementing just-in-time ordering.
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.
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.