How are Your Profit Margins? 

By Randall Orser | Small Business

Do you feel like your profit margins are being choked? You are probably finding that you are working harder and harder to make the same profit with the same capital. Or, maybe you’re finding you’re having to put more capital in to your business to stay afloat. You need to know where your profit margin is now, and find means to improve them.

Pricing

So, where do you start? Your pricing is one of the things to check out first. You may want to increase prices by a few percent as this grows your profit margins immediately; however, you need to find a percentage that won’t affect sales. This across the board increase on all prices is doable, but not always practical. A better approach is to look at those areas where a price increase can do the most improvement. This could be where your inexpensive items are marked up, while the more expensive items are not. A great example of this is inkjet cartridges, they cost more than the printer, however, you need them to run the printer and going and buy a new printer when the cartridges run out isn’t practical. Are you offering discounts or special offers? Discounts can give away too much, and don’t always get your recurring business, unless you keep giving the discount; and, special offers can be too charitable. If you’re offering discounts or have special offers, stop them or fine-tune them to increase your profit margins without increasing prices.

Mix It Up

Your sales that is. Have you analyzed the costs of your products? Do you know the margins on each? If you offer services, do you know the costs and margins on each? This is crucial to figure out a strategy you need. This could be looking at how to stimulate your customers to change their behavior by offering a loyalty scheme, or offering bundles (putting two products or two services together, or a product with a service).

Lower Your Costs

Looking at what it costs to produce your product, or service, and reducing them can definitely improve your margins. This isn’t going at your costs with a chainsaw, but doing an accurate study, and seeing the best areas to cut. Where are your orders coming from? A good way to lower advertising and marketing costs is cutting those that are not generating a good amount of sales, and moving your dollars to where they are generating good sales. Being purchasing savvy is another good way to lower costs, such as buying in bulk, or paying for a year and getting a lower rate per month or free months.

Waste Not Want Not

There are so many things that can waste your dollars. Leaving lights on or computers on when no one is around, keeping too much inventory on products that aren’t selling, and using old lighting technology that uses too much energy. Investing in a more efficient plant, can quickly payoff. What products and/or services differentiate you from your competitors? Focus on those, not the ones that are the same or similar to the competition. Low quality can hurt your margins, so look at products that are broken or below par, get returned from customers frequently, and perishables that are beyond their best before date; get rid of these as soon as you can.

Time is Money

Time is money, as they say, and it was never more apropos than on a television show, where a minute is worth about $200! – Dirk Benedict, actor

What’s slowing down production? What’s causing delivery delays? Fix those things and you will vastly improve your margins. How often are customer details taken down? This takes time, the more times you do this the more time the customer is on the phone, but not buying something. Cutting the time wasted taking details more than once, benefits you, but the customer more. You can expedite the process by templating or automating email responses, keeping stock of parts that are ready to assemble rather than having to do a whole run to make the product, which will save you money.

Feel the Churn, well maybe not

Are you watching when customers drop out of the purchase, or stop ordering? When customers drop, this is called churn, and it can cost your business big time. What causes churn? It could be your website is not performing adequately, and customers leave before completing the sale. Maybe it’s that your recurring customers are no longer coming around, and you need some help getting them back; such as targeted offers, sales or discounts, maybe a call from you the owner.

Cut the Slack, Customer Slack

Where are your delivery areas? Are there any outer lying areas that you deliver to, such as rural areas; may be good to cut those unless it hurts your business image. Maybe they can be turned profitable for now by delivering only on certain days, or subcontracting out those deliveries. If you sell business to business, look at your customers and let go of the less profitable ones. Don’t just do this willy nilly, do a thorough study to determine if they need to be let go, and do so as tactfully as you can. Of course, don’t forget your more profitable customers, look at the top ten to twenty percent of those, and see how you can get more business out of them.

Your Business Model Sucks

Sometimes in the end it’s your business model that needs an overhaul. You may be doing customized software, or some other product that’s customized, however you may want to change that model to packaged software selling licenses and get royalties from bigger companies. You can improve your margins with a lower cost by selling a complementary, outside supplied product, which may turn you from a manufacturer into a retailer, but could make total sense.

In our current economic climate, it can be hard to boost revenues, however increasing profit margins may be easier, which in turn creates a noticeable bump in the bottom line.

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