Effective Tips to Improve Business Profit Margins

At the heart of any business is to generate profit. Every stakeholder, from business owners to employees, lenders, suppliers, investors, government and customers, prefers to be associated with a profitable company. Profit margins are the key measure of a successful business. What are these profits, and how can business owners improve them?

A Brief Overview of Profit Margins

Profit is the money left from sales after paying every stakeholder except the business owner. It is the amount attributable to the business owner. The owner can either withdraw these profits as dividends or reinvest the money in the business to fund expansion. The higher the profit, the higher the company’s financial flexibility and stability. The biggest companies that enjoy customer loyalty, investor confidence, supplier priority, and attract the best talent are profitable.

All these benefits encourage businesses to strive to improve profit margins.

How Can Small Businesses Improve Profit Margins

You can improve your margin using two broad approaches:

• Increase Revenue
• Reduce Cost

Strategies to Increase Revenue

Increase Product Offerings and Cross-Sell to Existing Customers

The focus of any business is to increase revenue through volumes or by selling high-value products that command premium prices. You can expand your product offerings to increase sales volumes without investing too much in production costs. For instance, a baker can sell pastries, cupcakes, slice cakes, or sugar-free cakes alongside cakes. The ingredients are the same, but the offering has increased, attracting more customers. Many ice cream parlours sell the same ice cream as a cone, cup, or milkshake. You can also offer add-ons like sprinkles or extra Choco-chip or supplementary products like coffee, birthday candles and party poppers.

This is just an example of a bakery. However, you can be creative with your business and explore products that complement your offerings without adding extra cost and encouraging customers to buy more.

Expand Customer Base

You could revisit your sales strategies and look for ways to add more customers. Word-of-mouth publicity is the most cost-effective method of converting a potential lead into a sale. It also has a high success rate compared to print and digital ads. You could offer discounts or coupons to existing customers to refer your business to friends and family.

If your business sales depend heavily on your sales staff, especially business-to-business transactions, you could offer them attractive incentives for achieving a sales target. Maybe a vacation or a good bonus would motivate sales staff to deliver results.

You could also review the sales strategies that worked best for you in the past or those of competitors and re-run them. It is vital to measure the conversion ratio from a lead to a sale of each strategy and focus only on the one that generates the highest customers and makes them stay. 

Increase Customer Retention

Customer acquisition is expensive, but retaining a customer is more beneficial. You can win over their loyalty if you grow your customers organically by offering the best products and services. While this method may take time, it is sustainable.

Good quality and customer engagement are essential to winning customer loyalty. Instead of bombarding them with emails and leaflets, you can seek their feedback on the recent sale and reiterate how you strive to service them with the best intentions. A robust customer care process can go a long way, as the customer can contact you quickly. There, you can get transparent and direct feedback. Even if a customer is leaving, seek input and analyze why customers stay and why they leave. That can help you improve your offerings and make them more appealing to customers.

Evaluate New Revenue Streams

While the above methods can help you improve operating revenue, you could also branch out to other revenue streams. If you have office space or equipment, you can rent it. You can run a car in ridesharing if you have a car sitting idle. If you have an obsolete inventory where the product has not expired but gone out of trend, like clothes or bags, you can sell them at discounted rates. Heavy discounts could attract new customers to try your product and even pay more at times, converting some of them into loyal customers.

Value-Based Pricing

One effective strategy, but often avoided by business owners, is increasing the price of their offerings. Customers are price-sensitive, and convincing them to pay more for the same product may not be easy. Any price increase could see a pullback in sales volume. However, value-based pricing can help you increase prices without affecting customer count.

Offering something customers value gives them a reason to pay more. This will require market and competitive research and pilot runs to understand what adds value to customers, whether they are willing to pay more, and how much more.

You can segment your products as economy and premium or offer customization. For instance, a specially ordered cake is more expensive than a readily available one. By giving something extra, you can cater to the masses and classes. The bakery could create unique occasion baskets and monetize them on holidays, anniversaries, and birthdays.

Another way to command a premium price is to rebrand yourself as a luxury product. This could require you to focus on aesthetics, such as packaging, decor, and after-sales service.

Strategies to Reduce Cost

Increase Operating Efficiency

The best way to cut costs is to look at the books of accounts and identify gaps. You could reduce your office space and encourage remote or hybrid work. This will significantly reduce rental and utility costs. If your job is not customer-facing, you can shift the office to locations with cheaper rent.

You can go digital to save on stationery and adopt technology to automate mundane tasks. For instance, instead of manual invoicing, you can use invoicing software, freeing up your employee’s time to take up more work and improve efficiency. You could also outsource a few operations or hire freelancers for specific tasks.

You could also consider discontinuing products with poor returns and channeling those resources into selling products with higher returns.

An accountant can help you identify areas to improve operating efficiency and reduce costs.

Improve Inventory Management

If your gross margins are low, you could focus on improving inventory management through accurate forecasting. You could identify materials and goods that enjoy high sales and order them in bulk to get suppliers’ discounts. Also, try getting a better deal with suppliers by giving them bulk orders and signing supply agreements for future orders.

Contact DNTW Toronto LLP to Help You Improve Business Profit Margins

These are a few strategies. Not all may apply to your business. A skilled business consultant can find the right plan for your business and effectively implement it. To learn more about how DNTW Toronto LLP can provide you with the best business consulting expertise, contact us online or by telephone at 416.924.4900.