Guidance

HOW TO INCREASE YOUR PROFIT MARGINS

Profit margins are fundamental to business success and growth. How you choose to increase your margins so your business can achieve sustainable development is up to you – but taking small steps on a regular basis will help keep your customers on your side.

Increase margins gradually

It’s vital you keep a close eye on your competitors’ prices in relation to your own. Your customers will have more respect for the way you operate if you implement minimal price increases when necessary – so they don’t even really notice.

The two main ways of boosting your business’s profit margins are:

Reducing your costs.
Restructuring your prices.

Focus on small price increases and minor cost reductions regularly. You may be able to slowly increase your profit margins if you go about this in a smart way. For example, if you own a specialty store, look at marginally increasing the prices of some items at a time – rather than putting the price of everything up five percent overnight.

Hitting your customers hard in the pocket with significant increases will cause them to look elsewhere.

Reduce costs and lower your overheads

List all your business’s costs and overheads, ordering them from the most to the least expensive.

Find ways to reduce your highest costs. If you can cut each cost by even a small percentage, your overall savings will help improve your business’s profit margins.

Decrease raw material or stock costs

Ways to lower the amount you spend on raw materials or stock include:

Sourcing less expensive raw materials, perhaps by importing them from lower-cost countries.
Buying in bulk or joining a buying group to benefit from economies of scale.
Buying directly from manufacturers.

Reduce energy costs

Free or inexpensive ways to become a more energy-efficient business include:

Switching off lights, appliances, machinery and all other equipment when they’re not being used.
Replacing traditional light bulbs with energy-efficient ones.

Educate your staff on the importance of energy efficiency and lead by example. Also, find out if switching energy companies will save your business money.

Optimize your business’s processes

Look at all your business’s processes, brainstorming ways to make them more efficient to save money. You could, for example:

Cut your raw material costs by reducing waste.
Increase productivity by introducing lean manufacturing techniques.
Reduce the amount of money spent on inventory by implementing just-in-time ordering.

Increase prices without your customers noticing

Customers tend to notice large price increases – which can lead to a loss of business. However, there are several ways to increase prices and boost profits without your customers noticing.

Focus on items with higher profit margins

Calculate your profit margin on each product or service. Consider withdrawing products with low profit margins. Devote the extra shelf space to products with higher profit margins.

Begin by introducing limited quantities of new or alternative products with higher profit margins and monitor their sales. Incorporate those that are popular into your regular product range.

Similarly, if you offer services, identify the services that deliver the most profit to your business. Discontinue services that aren’t very profitable – or add value to them and raise your prices.

Introduce complementary goods or services with higher profit margins

When introducing new products or services with higher profit margins, choose ones that your customers have expressed an interest in buying. For example, if you run a supermarket that sells a variety of items including standard beers, think about adding some craft beers to your range.

Could you offer products or services that are in some way unique or unavailable locally? This could:

Set you apart from your competitors.
Justify higher prices.
Boost your profits.

Encourage customers to buy more – and to buy more frequently

If your loyal customers increase their spending and visit your business more frequently, your profits will increase accordingly. Encourage your customers to spend more by:

Stocking a wider range of products (with decent profit margins) and introducing complementary services.
Setting up a loyalty program that rewards them for frequent visits.
Upselling and cross-selling.

Try new marketing techniques

Try new marketing techniques to create a buzz about your goods or services, to attract new customers, and to increase sales. For example, social media marketing could inform a huge number of people about an exciting new product or service that you’re about to launch.

If you’re in a highly competitive sector, major changes may be necessary to boost your profit margins. However, most businesses can benefit from consistently making small changes in prices, cost reductions, energy consumption, and marketing.

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