Tips to Quickly Increase Your Company’s Profit Margins
Many business owners will look first at increasing sales when they want to boost their profits. However, increasing sales is a long-term strategy, and it can be expensive in terms of increased marketing and pre-sales costs. Fortunately, there are other ways that a business can improve its profitability out of its existing sales volumes. Here are ten ways to boost profit margins without increasing sales.
1. Analyze Gross Margins
The first place to look when you want to increase your profits is your gross margins. Look at the costs of the products you sell and consider if there is any way of reducing the direct costs of that product or service. Could you buy raw materials cheaper, for example? Could the product be manufactured or fabricated more efficiently? If you are running a business that sells the time of employees, look at your employee utilization rate. Could you provide the same level of paid days or hours with fewer employees?
2. Increase Prices
Sometimes business owners are reluctant to increase prices because they fear that price rises will result in losing customers. However, if the increased gross margin that you gain by charging higher rates is more significant than the cost of the lost customers, the business will benefit overall. If you have not increased your prices for some time, the effect of inflation on your expenses will have eroded your net profit. So, compare your prices with those of your competitors and see if a price rise might be in order.
3. Push Your Most Profitable Products
Look at your gross margin analysis mentioned above and identify the products with the highest gross margin. Switch more of your marketing spend to the high-margin products and, if appropriate, gear your business to produce more of the products that earn you the most money. Also, consider the possibility of cross-selling your high-margin products to customers who buy lower margin products in your range.
4. Differentiate Your Products
Investigate your competitors and see if there are ways that you could increase the perceived value of your products without adding significantly to the costs. Look at how you can differentiate your products from your competitor’s offerings so that you can justify a higher price. Product differentiation may already exist, but you may not be highlighting those differences in your marketing.
5. Stop Offering Discounts
Winning a sale at any cost is never a good idea, so stop winning deals by giving discounts; let your product speak for itself. If you give away discounts too readily, you will be eating into your gross margins. If you stop giving discounts, you may lose a few sales, but you will be making more money on the deals that you win.
6. Sell Third-Party Add-Ons
Depending on the types of business you run, you may be able to up sell third party products to your customers. The most common types of up sell of this kind are things like extended warranties or insurance on consumer products. In some types of businesses, you may also be able to come to a commission agreement with a company that sells complementary products to your own.
7. Cut Down on Wastage
Look at ways that you might be losing money through wastage or theft and take steps to prevent that wastage. The steps that you could take might include more efficient manufacturing processes, better staff training, or changing your raw materials supplier. If theft is your problem, then implementing better security systems and procedures might be appropriate.
8. Take Advantage of Cash Settlement Discounts
If you are offered cash settlement discounts from your suppliers, then it would make sense to take advantage of those discounts whenever you can. Keeping a reserve of cash in the bank may appear to be a prudent move. Still, if that money is not earning you interest, it would be better used paying suppliers faster to get the early settlement discounts. In some cases, you may even find the percentage discount that suppliers offer is higher than the cost of borrowing the money to pay the supplier early.
9. Charge for Services that You Currently Offer for Free
Consider if you might be giving away too much to win sales. For example, if you offer free delivery, and your competitors do not, could you charge for that service? Or could you increase your prices to cover the cost of free delivery? Also, think about any additional services that you might be able to offer for a minimal extra cost. For example, if you employ delivery drivers, could you charge for the driver installing the product for the customer? Or could you charge extra for guaranteed 24-hour delivery?
10. Cut the Slow-Moving Products from Your Product Range
Slow-moving products could be draining your profits. If you sell a physical product, then the cost of holding an inventory of a slow-moving item could be eating into your gross margin. You may also be spending excessive amounts of money on marketing and selling things that you sell in low volumes. So cut out the deadwood and focus your time, money, and energy on the products that sell fast.
The Bottom Line
The key to maximizing profit does not always depend on boosting sales. When you are working with finite resources, or a steady but limited demand, you can still increase profits by looking at what you sell and how you sell it. Even if you can quickly grow sales volume, it is always worth thinking about how you might squeeze some extra profit out of your revenue.
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