One of the key goals for most businesses each year is to increase their profits. There are many ways you can improve your profit margins. Most businesses instinctively think that the solution to achieve this is to increase their sales volumes. Whilst that is one possible solution, it’s not the easiest!

You’ve got to find new customers and increase your stock levels, which takes up more of your available cash. You may need to recruit new staff too, who may take some time to reach the required productivity levels. In the long run, increasing sales may work out, but it will take some time!

The easiest way to increase profits is to improve the profit margins on your current sales. The customers already buy your products, and if you improve your margins on these sales, then profits will increase instantly!

 

Ways to improve your profit margins

Increase your prices

Pricing is the most effective way to influence your profit margins. Customers will normally accept 1-2% price increases with no issue at all. To increase prices further, then you need to understand what your customers value from your product or service. This is to ensure they feel they are still receiving a good deal.

Increase the perceived value of your products

If customers buy your product or services based on the value they receive, it is much easier to increase prices. Ideally you want them to create an emotional attachment, where their life is better due to your offering. To increase value, you must understand why customers buy from you, and what additions would add most value for them. It could be something as simple as 24/7 e-mail support, or a slick returns process.

 

Track your profitability by product/customer

Tracking profitability tells you which areas are making you the most money, and therefore the ones to focus on. It may also inform you there are some products or customers that you make no money from at all! You can use this information to decide whether to continue with low margin areas, or re-price to improve your margins. This reporting is often an eye-opener as where businesses think they make profits and where they actually do can be very different!

 

Bundling products together to increase sales

Selling complementary products in packages can increase revenue and profits with lower additional costs (i.e. marketing costs removed). As your customers are already buying from you they will be more receptive to buying additional products from you. Many businesses now offer tiered packages (i.e. gold, silver and bronze packages) with different offerings to try and achieve this. Many focus on using the psychology that customers don’t always want to go for the cheapest option.

 

Improving customer retention

If your customers continually purchase from you then there’s less additional marketing or sales costs for acquiring new customers. Find out the reasons why existing customers don’t make repeat purchases and establish if these can be easily resolved.

 

Removing or reducing discounts offered

As mentioned previously ideally you don’t want customers to be purchasing based on price. However, if you do need to use discounts to drive sales make sure they are personalised. Personalised discounts should drive increases in sales as you have targeted a driver for the customer to buy from you. Blanket discounts are likely to reduce margins as buyers will wait specifically for these promotions.

 

Reducing your business costs

There are a few different ways in which you can reduce business costs, such as:

  1. Asking for discounts from suppliers for bulk purchases
  2. Work with existing suppliers to establish ways to reduce costs (i.e. weekly instead of daily deliveries reducing transport costs)
  3. Locating different suppliers who you can buy from at a lower cost
  4. Reviewing your cost base and removing any costs that aren’t critical to the business. Just be careful here that you don’t remove something that your staff or customers really value, which could create a negative impact on your brand.

Improving your processes

Innovation to improve processes will make your business more efficient, and reduce the cost spent on administrative processes. This could range from automating recurring invoices in your accounts system to using chatbots on your website for answering frequently asked questions by customers. You want your team spending their time on value adding activities, not manual admin tasks!

 

Reducing business wastage

There are a couple of ways to achieve this. One is to improve stock management to reduce the number of items which sell infrequently (which are discounted to remove them from the business). Make sure you have the data available to make effective decisions on stock levels and purchases. Another area is reducing the number of items with defects by improving the quality of your processes in getting the finished product/service to your customers.

Incentivise your team

If you know which products or packages make you the most money, you could incentivise your team with rewards for sales of those particular items. This may lead to them increasing the sales of these items through upselling or cross selling.

 

Focusing on improving your profit margins enables you to generate additional cash to invest in your business for further growth, and also increases the value of your business. You also create extra flexibility when making decisions due to having more cash available.

If you would like help identifying ways to improve your profit margins, please contact Paul here, at Enrich Accounting on 07403 407455 or at paul@enrichaccounting.co.uk