World Executives Digest | A Small Business Owner’s Guide on How to Increase Profit Margins | Did you know that only 40% of small businesses are profitable? Another 30% of businesses break even and another 30% lose money. The businesses that are profitable may be profitable by the slimmest of margins and struggle.
If you want to ease the stress of running a business, you need to make sure that it’s highly profitable. You can make that happen by creatively increasing profit margins.
Keep reading to discover how you can increase profit margins to create a more profitable business.
The most obvious way to increase profits is to increase the prices of your goods and services. How much you should raise prices depends on how you position yourself in the marketplace and what the market will bear.
For example, if you have always positioned yourself as the best value in your industry and you double your prices, your customers will have a hard time adjusting. You’ll have to work harder to prove that your company is still the best value in the industry.
You also want to make sure that your price increase will increase profit margins. Start by calculating percentages of your current profit margins.
Then play around with different scenarios. What would a 10% price increase do for your profit margin? How would a 15% price increase look?
Working under different scenarios will help you determine what the right price is for your market and your profit margins.
Conduct an Operations Audit
Another reason why your profit margins are low is that your operating costs are too high. You could be wasting time, energy, and money and not even notice.
An operations audit will reveal the main sources of waste in your business. Employees only work about 60% of the time. They’re interrupted about 50 times a day, spend time on email, and sit through unproductive meetings.
Your systems may show another money leak. There are tasks that can be automated that your employees spend time doing.
Cut Operations Costs
After you have your operations audit, take specific measures to cut operations costs.
Just by reducing the waste in your business, you can impact the profit margins. You lowered the cost of production, which means more money for the bottom line.
Limit Available SKUs
Companies that offer too many products have to deal with inventory costs and additional production costs. That can drain the profit margins a great deal.
Instead, limit the number of products available at different price points. You can have a few SKUs to appeal to price-conscious shoppers and a few products for value shoppers. Then you have your high-end items for people who value quality more than price.
That will appeal to your customers and you’ll lower your inventory and production costs dramatically. That can add to your profit margins.
Don’t Discount Prices
Discounts are good when you need a sudden boost in sales. If you offer them too often, your customers will get used to the deep discounts.
Remember that every time you offer a discount your profit margins will take a hit. You’ll have to make your business profitable by selling more.
When you discount your prices often, the perceived value of the products drops. Customers are less likely to purchase products at full price. They’d rather wait until the next big sale.
Expanding markets doesn’t mean that you offer more products. It means you expand where you do business. A local business can expand into more counties or the entire state.
It can be a costly investment to expand markets at first, though you can increase profit margins by selling more.
Create an Innovative Culture
Businesses collectively lose more than $11 billion each year due to employee turnover. If you find yourself with high employee turnover, you need to revisit your company culture.
An innovative culture will do two things for your business. The first is that your employees will feel more empowered and creative. That will help keep them engaged.
The second thing an innovative culture does for your business is that you get to create exciting products and services that customers want. You’ll always stay ahead of your competitors in the marketplace.
Retain Your Customers
The mistake that business owners make is that they focus on acquiring new customers rather than developing relationships with the ones they already have.
This shortsightedness can lower profit margins because you have to spend more money on marketing and sales to get new customers.
Instead of trying to get new customers, learn the customer lifetime value. That’s the amount of money a customer spends with you over the course of their relationship with you.
The higher the customer lifetime value, the higher your profit margins. The secret to improving the lifetime value is to provide an incredible customer experience.
Deliver on your promises, have a customer-first attitude, and work hard to keep your customers.
Have a Vision for Company Growth
A plan for growth is the one thing that will tie all of these methods to boost profit margins together. You can say that you want to boost profit margins by 15% over the year before and demonstrate your plan to do so.
This will help you sell your vision to all stakeholders – employees, customers, and investors.
Increase Profit Margins the Smart Way
There isn’t one right way to increase profit margins in your business. You can increase the prices, cut costs, or work to build a better, more sustainable business.
That involves a company culture focused on innovation, growth, and customer service. You’ll retain your customers and your employees instead of burning through them. Your operating costs will decline on their own because you don’t have to replace employees and lost customers.
Did you find this article useful? Head over to the Small Business section of this site to see what other tips with have for you.