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How To Increase Your Profit Margins: 7 Strategies To Improve Profitability

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How To Increase Your Profit Margins: 7 Strategies To Improve Profitability

When running your own business, one way to effectively gauge its success is by measuring the company’s profit margins. Your company’s profit margins refer to the percentage of profit left after the cost of goods have been deducted. Entrepreneurs need to constantly find ways to increase their profit margin to ensure that their business can not only survive in the competitive marketplace, but thrive.

Here we’ve broken down some of the best ways to increase your business’ profit margin:

1. Know Where You Stand

You’ll have to properly manage and evaluate your profit margins in order to effectively increase them. How do they look at the moment? Have they made any improvements compared to the previous months or quarters?

Keeping track of your profit margins will help you determine which areas of your business are not doing well. This could be a failing marketing strategy or poorly performing product. Pin pointing these things that are utilizing the company’s budget but aren’t generating much profit allows you to eliminate them from the equation. This will create room for products and services that do create a higher profit margin and improve your company’s profitability.

2. Improve Your Inventory Management

It’s not uncommon for businesses, especially those in the retail industry, to make inventory management mistakes. If a company has a poorly performing product that isn’t selling well, it could end up with a surplus of stocks that may be hard to get rid of. This would force the company to conduct sales and price markdowns, which could lead to a significant decline in its profit margin.

One way to avoid this is to improve the company’s inventory management strategies. Keep close track of your inventory so you can make informed estimates as to how much merchandise you’ll be able to sell each month. Efficient inventory forecasting will ensure that you won’t get stuck with excess stocks sitting around in the warehouse. With less inventory to hold on to, you’ll also reduce your overhead costs and save more on storage fees.

3. Practice Upselling and Cross-Selling Products

Upselling and cross-selling are two sales techniques that aim to add value to a single product or an existing customer. With upselling, the goal is to convince a customer to buy an upgraded or premium version of the product or service they’re purchasing. Cross-selling essentially markets two products together, as going hand in hand, so a customer buying one is more likely to also buy the other.  Both of these strategies can effectively increase your profit margins.

If you’re going to utilize these tactics, you’ll need to train your staff to communicate the offerings to customers on the sales floor. For example, a customer at a car dealership likes a specific car model. The owner will want to make sure his or her sales team knows to promote all the various add-ons the customer can purchase to upgrade that model, such as leather interiors or satellite radio. This is upselling. Another example is a customer at a makeup retailer purchasing a blush powder. The store owner will want to ensure that the staff knows to also tell the customer about their variety of brushes they can purchase with the blush so that they can apply it properly. This is cross-selling.

Product placement is also important. It helps to place your best-selling products in strategic locations around the store where your customers can easily see and access them.

4. Increase Prices As Necessary

Another way to increase your profit margin is to raise your prices. If you see that your profit margins haven’t been improving over the past few quarters, but the product demand remains the same, it might be time to reevaluate your prices.

When thinking about increasing your prices, you have to consider the prices that your biggest competitors are offering for the same or similar products. Raising your prices when your customer offers a lower alternative for the same commodity could be dangerous. You could also opt to upgrade your current product by improving it or adding additional features to justify the price increase.

5. Find New Customers

Research reveals that finding new customers costs 5 to 25 times more than retaining current customers. This doesn’t mean you shouldn’t do it, though. In fact, a cost-effective way to find new customers is to continue marketing to your existing ones. Word-of-mouth remains to be a powerful advertising strategy that has strong value. Many people trust the word of their friends or family more than advertisements themselves. Find ways to encourage your existing customers to market your brand to their friends and family, for example, offering them incentives, discounts and rewards.

6. Be Smart About Giving Out Discounts

As you go about giving your current customers discounts and incentives – whether it’s to thank them for being loyal to your brand or referring your company to others – be smart about the deals you offer. If you blanket uniform discounts to all your customers, it may be harder for you to see an increase in your profit margin. Your customers will have different buying behaviors and preferences, so study their purchase history and tailor discounts accordingly. Try notifying them about new discounts through an email for a more personalized approach.

7. Reduce Your Business Expenses

It’s more difficult to see an increase in profit margins if your business expenses – both operating and overhead costs – are high to begin with. Investing in automated systems is a great way to reduce these costs, and also improve your company’s efficiency and productivity.

Another great way to reduce expenses is to renegotiate prices with your suppliers or ask them for a discount if you’ve been doing business with them for a significant period of time. You’ll have to offer something in return, like a down payment for a bulk order. This would allow you to cut some of your operating expenses which would, in turn, improve your profitability metrics.

Conclusion

Improving your business’ profit margins is all about implementing the right strategies. As with many things in business, finding the strategy that’s right for you and your business may take some trial and error. Be open to trying a few out and seeing how effective they each are in increasing your margins. While we believe in the effectiveness of the strategies detailed in this article, it’s worth noting that there are many others you can employ. As always, it’s imperative to do your research.

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About The Author
Dane Panes started freelance writing in 2017. Since then, she has written about a lot of topics for different businesses. She started writing for SMB Compass in March 2020 and has been a full-time content writer ever since. Now, she focuses mostly on topics related to entrepreneurship and business financing.
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