How to Increase Your Profit Margins
A lot of business owners make the mistake of focusing on top line revenue. In fact, it’s the profit margin where you should be focusing your efforts. In this guide, you will learn various strategies to increase your profit margin so you can compete.
How to Increase Profit Margin: Why Is it Important?
Profit margin refers to the difference between your income (or the sales generated) to that of your spending (business operating costs). In order for a business to stay afloat, you need to increase this margin so you know for sure that you are making money from your business.
Thus, it is easy to see why profit margin is integral to the fundamental growth of a business. Without it, your business simply cannot survive.
There are no hard and fast rules that will pinpoint the ideal profit margin for a business. It varies from one industry to another. However, experts agree that anywhere from 10-20% is a good start for small businesses.
How to Increase Profit Margins: 11 Strategies to Use
If you want to give your profit margin a boost, you can implement these strategies to see results and allow your business to thrive.
1. Focus on Incremental Growth
In your aim to boost profit, it is easy to get ahead of yourself. However, you need to focus on the small steps you must take in order to achieve your ultimate goal. By taking small and incremental steps, it is easy for you to monitor your progress and keep it attainable. Gradually increase that profit margin until you are close to your ultimate objective.
2. Speed matters
You need to strive for a faster turnaround when it comes to selling your items – from the time of order placement to delivery. This will require you to evaluate your existing orders processing system so you can identify areas for improvement.
Strive for a shorter order cycle so you can get more orders completed in the same amount of time. The more orders you can fulfill, the higher your profit margin will be.
3. Aim for a higher average unit of sale
By increasing the average unit of sale per customer, you can facilitate the order velocity. It also helps you lower the overhead burden since you are fulfilling fewer orders but with a higher average unit of sale. For example, you can improve your profit margin by fulfilling 100 deliveries valued at $100,000 instead of 200 deliveries for the same amount of order value.
4. Improve your inventory system
Markdowns are a sure-fire way to kill your profit. Make sure you avoid them as much as you can. Start by improving your inventory so you know what items you have on hand. This is beneficial in two ways: you have supply available when customers need to order, and you reduce wastage due to obsolescence.
This step requires a good reporting and analysis system in place so you can identify which items in your inventory are in demand, and which ones are slow moving.
5. Do not compete on price
It is tempting to drop your prices in order to compete in the market. However, there are other more effective ways to differentiate yourself other than lowering your price. You can offer superior value for your products or reduce the non-monetary costs of doing business with you (such as offering free delivery for a minimum order value).
6. Review prices and stop discounting
Make sure you evaluate your pricing regularly. It should reflect any increases in the prices from your supplier. In addition, avoid the urge to give out discounts too often. The only way you can maintain or boost profit margins by offering a discount is if you can increase the number of sales.
7. Fine-tune the production process
Focus on streamlining the production process so you can reduce overhead costs. When you save on the production overheads of your business, you can maintain prices for your products or services but still increase profit margin.
8. Focus on high-margin products
Not all products that you offer generate the same amount of contribution to your profit margin. Some products have a higher profit margin, and you need to double your marketing efforts to sell them.
Imagine this: aim to get more sales for products with 40% or more in profit margin. It will save you time and effort rather than trying to sell those that have a profit margin of 5% to 10% only.
9. Increase average order value
You can come up with various marketing strategies and gimmicks to get your customers to spend more per order. For example, you can offer free delivery when you reach a minimum order threshold. There is a psychology behind this since most consumers would prefer to spend more to enjoy free shipping rather than pay for the shipping itself.
You can also encourage your consumer’s spending behavior by recommending products that are relevant to the ones they are thinking of purchasing.
10. Optimize vendor relationships
It is a good idea to maintain a good relationship with your vendors and suppliers. You can leverage that relationship to negotiate contracts with them so you can get discounts or lower the cost of acquisition for certain goods.
Any savings that you can get from your suppliers will translate to higher profit margins for your business.
11. Customer retention is essential
The ability to retain your customers is important in your quest to increase profit margin. There are many ways to do this such as building a loyalty program. Return customers provide a higher impact on your profit margin than new customers. Make sure to keep them happy by offering a loyalty program that offers exclusive discounts and perks.
At the same time, you should keep track of your customer behavior to see any “drop points” in their purchase history. Why did some of your customers not make any recent purchases? Focus on how to improve communication with them so they keep using your products or services.
The Bottom Line
Knowing how to increase your profit margin doesn’t take rocket science. However, it entails a lot of planning and strategy to make the most of what you are selling now. Adaptability is an important skill that business leaders need to know to thrive even in a changing market.