How To Make A Profit: 8 Strategies to Increase Profit Margin
Maximizing profit is essential to grow every business. Everyone understands this. Nonetheless, entrepreneurs often struggle with getting as much profit as possible from sales. As it turns out, little changes make a big difference. You don't have to feel locked into a price formula that guarantees a certain margin, and then cross your fingers and hope for sales. There are many strategies you can employ to bring more money into the business, so it can sustain and grow over the long term.
These eight strategies don't just take into account what you charge. They also look at how you manage your outflow of money. Further, they recognize that your mindset as an entrepreneur, and your relationships with partners in your field, can determine your success. Have a look and think about your own business. Do any of these strategies look like processes you can implement, in order to turn your passion project into a viable, thriving company?
Incremental Price Increases
When was the last time you went into your local coffee shop and noticed your latte was more expensive than it used to be? Very likely, the difference wasn't much -- perhaps 15 cents out of five dollars. It wasn't enough to discourage you from making your purchase, and certainly not enough to make you drop your morning habit. But think of the volume of that coffee shop. That modest increase equates to big revenue over time.
Raising your prices just a bit gives you more profit. Some recommend increasing by 3 percent on every product. That's 15 cents on a five dollar cup of coffee. But three percent is 3 percent -- it's something your customers may not notice, but make for a more robust revenue stream. Ideally, you should continue to raise prices on a periodic basis. Your cup of coffee did not cost five dollars 10 years ago, or even five years ago -- likely those prices went up by a few cents every 6 months or a year.
Incremental Cost Decreases
The same experts who recommend upping prices by 3 percent say you should do the same with costs -- decreasing them by the same figure. Right off the bat, you've increased your profit margin to 6 percent. Since only half of that increase is customer-facing, it's likely not an impediment to sales. It shouldn't reduce your volume, but makes your balance sheet healthier.
Of course, many entrepreneurs will claim their costs are as low as they can possibly be. But that's usually not the case. Remember 3 percent is only three dollars out of every one hundred. Take a close look at places you can save. Curb inventory waste -- particularly if you are in the food industry. Implement energy-efficient procedures at your locations to cut down on power costs.
It's not just your utility usage you can update. Review your lease agreements and insurance contracts and see if you can reduce your rates or fees. Talk to your credit card processing company to see if they will lower your per transaction fee. This may sound like a lot of detail, but it comes down to just taking some time to really examine where your money goes -- and where you can cut back.
Also, don't forget about debt. Servicing that debt may be a reality, but it helps if you can understand how much that debt is costing you and your business over time.
Renegotiating With Suppliers
A big part of cost reduction is positive relationships with suppliers. If you can handle additional inventory volume or require additional raw materials, see if your suppliers will reduce the per unit cost. There may be an option to get a reduced rate for a long-term relationship or to bundle services with one supplier.
Your consulting contracts are also important here. Have a look at who you have on the books. All of these individuals may be important, but the fee arrangements may be less than ideal. If you pay an ongoing fee for a professional whose services you rarely use, ask if you can switch to a per-issue or per-project basis instead. Even if the hourly rate is higher than with a long term agreement, you may save money in the long run.
This all comes down to one question: Are these arrangements I have with suppliers ideal? If not, how can they be better -- while still keeping up the positive relationship with those the company relies upon to operate.
Optimize Cash Flow
Have a look at when you pay your bills. If you default to, "I pay them on time, I'm doing it right," that's in fact only part of the answer. You have probably noticed that your invoices give you a significant amount of time to pay. Instead of getting those accounts to zero right away, pay them on the due date. You won't incur extra fees, but the money will gain interest in your bank account.
The other option is to take advantage of suppliers who offer a discount for early payment. You can save a big amount, say 10 percent, on your costs by clearing off invoices immediately. Depending on your overall situation, this may be something you want to consider. If you have a thriving business with strong cash flow, you may have the option to do both.
Optimal cash flow goes both ways. If you are a B2B company, you might want to offer discounts for early settlement. This gets cash in the bank and reduces the risk of nonpayment or outstanding liabilities on your books. Little things, like when money goes in and out of your business, directly impacts profit margin -- because it determines the financial flexibility you have to market and improve your product.
To help structure your cash flow strategies, you should do some forecasting -- so you can predict where your sales are going, and what adjustments you may need to make.
Focus on Customer Retention
So with all this talk about asking for a few extra dimes per sale and renegotiating contracts, it's easy to forget about the one at the center of your growth strategy: the customer. It's an old adage, and truth, that it costs more to recruit a new customer than to make a repeat sale to an old one. Keeping this in mind is essential to increase profits. Do your best to know your current customer, so you can meet their pain points with products and services they want and need. When things are going well, you can even throw in an upsale to make the profit even bigger.
An easy example is you, going to that coffee shop. If you go every day, you're a repeat customer, If you are satisfied with the product and service, you'll keep coming back -- and don't mind paying an extra 3 percent every 6 to 12 months or so for that cup of coffee. But if that coffee shop suddenly didn't feel right to you -- if it started to ignore your needs as a customer -- you might take a walk down the street to the competition.
There are entire marketing treatises written about customer retention. Remember the key is to just know what people like, and to keep them coming back. This will cost you less in advertising. It will hopefully turn your current customers into brand advocates. And when you want to eek out a bit more revenue from each sale, they will be more likely to pay.
Adopt a Growth Mindset
Your business is your passion -- as it should be! A surprising number of entrepreneurs default to passion without thinking too much about revenue growth. This may be admirable. But from a business standpoint, it's a lost opportunity. You can create a strong business that pushes your goals to the forefront and makes money. You simply need to switch your thinking. Is this business a hobby, a home business I have as a pleasant vocation, or something larger?
After all, starting a business is an activity that, in theory, is open to everyone. Remembering that you're all on the same playing field is empowering -- or intimidating. Unless you have the motivation to grow your business, your passion can simply fall flat in the face of declining profits. It's a reality that you need to make money in order for the business to succeed, even if you would do this job for free.
Don't be shy about making profit your goal. You have the option to do great things with those profits. You can reinvest in your company so that your passion becomes even bigger. You can broaden your reach into new markets, bringing the work that you love to more people. With a thriving business, you can hire people, contribute to the economy, and build a nice life for yourself.
That's why increasing profit margins can be largely about perspective -- and understanding that it's an important part of executing on your business vision.
Corporate Social Responsibility
That leads to another way to build your profit margin. Corporate social responsibility. This is a term that is widely understood as how the actions of a business affect the community. A responsible business minimizes negative environmental and social impact, and instead takes steps to improve lives. That may sound like a hefty ask, but it can be as simple as recognizing the role CSR plays in consumer buying decisions. It may take only a few small changes to demonstrate CSR, and your profits can increase as a result.
Take a look at your industry and community. How can you do things better? For that coffee shop, it may be about serving at least one locally-roasted, organic blend. That may be more expensive to stock, but also commands a higher profit margin. Customers will pay a little bit extra because of the good work done along the consumer chain. That extends from the local small business to the producers, as well as the minimal impact on the earth.
CSR may take only a few key tasks. Brainstorm with your team about what you can be doing better, and how best to implement it.
Create an Action Plan
That's when you need to take a step back and plan the implementation of your profit increasing strategies. Although a bit of haphazard changes may have some effect, an off-the-cuff approach may have less desirable results. Let's say you renegotiate with your supplier, but don't pay attention to waste -- you may end up with a lower per unit cost, but those savings are used up through careless use of materials.
An action plan gives you a guideline of how you should proceed, one strategy at a time. You can match your strategies with specific goals and review their effects after 3 to 6 months. Then you can adjust and move forward. You'll find out what worked, what didn't, and how best to make your business the thriving enterprise it needs to be.
Get The Best Accounting Services
The right accounting team can help you to determine where your profit is at, and where you can improve. Contact Honest Buck today to see how we can help you grow.