4th February, 2021
Many business owners think you need to increase sales substantially to make more money. In reality, that’s the more difficult path to boosting profit margins, especially in the short term. Here are some alternatives.
A prospective client was in some difficulty and hoped to increase sales in order to lift profit.
He kept on and on about increasing sales to new customers. But I worked out that his average sale per customer and his prospect conversion rate were so low that he needed 3,750 meetings with prospective customers in the next year just to get back to breaking even.
There’s another way to make more money, which is to increase your profit margins. Same customers, same level of physical sales, same systems, no more staff or extra overhead costs, existing premises and capacity — isn’t that a thought?
Profit margin is the degree to which you’re making money. To calculate profit margins for your business or any given activity, you’re dividing income by revenue.
So, with this in mind, here’s how to lift profitability by boosting your profit margins.
Before you begin considering strategies to boost your profit margin, figure out what your gross profit margin actually is.
Make sure you know your up-to-date, overall gross profit margin. It’s no good using estimated inventory figures or working from the figure in your last Annual Financials.
Find out the gross profit margin on each of your products and services, and analyse your gross margins over different business divisions, product categories, suppliers or customer categories according to your business.
This way you can identify both low margin or loss-making items and profitable activities or products. Then you can stop selling low margin lines and focus on the ones that work.
Prepare some interim accounts to the last month-end from your accounting software. Using the inventory system in MYOB means there’s no need for a stocktake.
Get some benchmarking figures from your accountant. How does yours compare to the industry average?
Here are some strategies to consider when you want to increase your bottom line.
Do you charge all customers the same price? If so, why?
You’ll find that some are less price sensitive than others, especially if they’re not paying for the bills themselves, like government or larger organisations.
Have you increased your prices to match supplier price rises and kept up with the competition?
Yes, I know it can be difficult. But often we business owners are more worried than our customers about price and, let’s face it, our overheads are going up all the time.
It’s true that you might lose the odd customer, but if your margin is 50 percent, a 10 percent increase in prices means you can lose 17 percent of your customers yet be no worse off!
Discounting can be the death of many businesses that don’t realise how badly this destroys your margins.
Using the same example as above, at the same margin of 50 percent, if you discount your prices by 10 percent, you need a 25 percent increase in sales just to stand still. Say goodbye to your day off!
Differentiate yourself in other ways, whether by giving superior value, going the extra mile or reducing all the other (non-monetary) costs of doing business with you – effort, time, anxiety and emotional costs.
By finding ways to increase each customer’s spend, you’ll boost your bottom line growth. Learn what your customers want and create more opportunities to sell it to them.
Train your staff to upsell and cross-sell. Highlight opportunities where you could increase the transaction value of a sale. Make sure your processes and systems are designed to maximise additional purchase opportunities.
Increasing your prices or refusing to compete on price becomes much easier if your customers perceive higher value in your brand than in others.
Ask your suppliers for a discount or offer to buy goods in bulk. You can often get things more cost efficiently if you streamline your purchasing lines and get all your goods from the same vendor.
Don’t be afraid to shop around with other suppliers if you’ve exhausted options with your existing ones.
Whether stolen by staff or customers, losing goods or cash is very costly.
Do you have anti-shoplifting or theft prevention systems in place, even for staff? Do you balance your tills? Who does your banking?
Every dollar saved is a dollar earned. Go through all your expenses with a fine-toothed comb and make sure there aren’t a bunch of little expenses adding up to a whole lot.
Check all supplier bills personally. After a while you’ll get a feel for things which aren’t right. Don’t be surprised to find that you’ve been overcharged for goods or services you haven’t received or been billed at the wrong prices.
Assess your staffing. Are there areas of overlap or tasks that can be streamlined, consolidated or automated?
Are there other areas of waste? Inspect every purchase, line by line, and minimise supply where possible.
Increasing your margins is all about making the most of what you sell right now. As Jay Abraham, the marketing guru would say: “Get everything you can out of all you’ve got!”