Three Basic Ways to Increase Profit Margins
Increasing your profit margin is one way to positively influence your net profit. There are things you can begin to implement in your business today which will result in more dollars appearing in your bottom line.
There are three easy to implement ways to increase your profit margins: Maximize margins, Reduce Costs and Increase Prices.
1. Maximize your existing margins.
· Increase high-margin items and decrease small margin items. Every business that offers a range of products or services will have a range of high and low margin items. If you have too many low-margin items, however, you will never be able to increase your bottom line because there is not enough profit to do so. High margin items generate the most income, so your staff should be focused on selling these items and bringing in the highest sales.
· Stop discounting. I'll review in another e-class why discounting hurts your business, but in this case you should stop discounting because it's eating away your margins. There are better ways to generate leads and repeat business without costing you money. If you have received a discount on products or services from your supplier, keep that discount to yourself instead of passing it on to the customer.
Reduce fixed and variable costs.
· Be aware of and manage spending. Establish clear protocol for sign-off on purchases over a specific dollar value, and keep a close eye on the people who are authorized to spend company money.
· Recession proof your spending habits. Remember that cost management will help your business survive through high and low periods in the economy. It's easy to get carried away and spend freely when the company is doing well, but good money management habits will keep your business alive through struggles.
· Renegotiate or refinance. Can you refinance your loans, or negotiate a better interest rate? Consolidating debts and restructuring your business finances to reduce fees and other hidden costs can be a valuable exercise for your company. Interest rates and bank fees are big culprits of profit theft.
· Renegotiate with suppliers and vendors. Just like you would do with the bank, make sure your product and service costs are competitive. Renegotiate with your vendors and suppliers on a six-month or yearly basis, and always deal with decision makers who have the authority to give you better rates.
· Review staffing needs, wages and commissions. Of course you want to treat your staff well and reward good performance, but keep an eye on this category of spending to ensure it's kept at an appropriate level. If you offer a rewards program, make sure you can afford to deliver staff rewards as promised. Renegotiate commissions every year, and make sure your staffing levels are appropriate to the needs of your business.
· Cut invisible costs. There are expenses in every business that go unnoticed and can be eliminated from the budget. Take a close look at all of your expenses, and identify any extras or amenities you can live without. Some examples are:
> Magazine subscriptions
> Brand-name office supplies
> Daily snacks and refreshments
> Brand name coffee or tea
> High end marketing materials
· Don't be afraid to boost prices by 10%. Many business owners are afraid they will lose customers if they increase their prices, but this is rarely true. Most customers won't notice a hike in prices, so you'll lose very few.
· Make sure your prices are higher than your cost. Obviously, you might think, but make sure you consider not only the cost of providing the product or service to your customers, but the cost to you if you do not sell all the items that you ordered. Build room in your prices to accommodate fluctuations in sales volume.
· Include all expenses in your pricing. Remember that all your expenses need to be factored into your pricing structure. Include both the cost of providing your product or service, as well as the cost of running and maintaining your business. You could have huge margins, but if you don't factor in operating expenses, you may have priced yourself out of business.
· Price for perception. Price will impact how customers perceive your business and your product or service, so consider this when you are establishing your pricing strategy. Consider what customers think would be 'fair', as well as what your competitor's price is, the image you are trying to create, and the perceived value of your product or service.
Still afraid raising your prices will drive away customers and cause you to lose money? Schedule a complimentary strategy session and I will demonstrate how unlikely this truly is.