When we discuss marketing strategies, sales performance, and other business strategies, there's always one underlying motivation - profit margin.
It doesn't matter how stellar your performance is, if the business is not making money, there is no business. Though we typically discuss techniques that ultimately contribute to increasing your profits, sometimes you need to focus on the basics.
Today, you're going to learn how to increase profit margins for your small business quickly. These basic changes should increase your cash flow and allow you to do more with your brand down the line.
How to Increase Profit Margins in Small Business?
Pandemic has taught us many things, including the value you drive from minimalism. So, apart from the crucial metrics like sales performance, it's time to discuss a few intelligent strategies that will cut wasteful practices and increase your profit margins with a high degree of certainty.
Strategy 1 - Get Rid of Unnecessary Operating Expenses
If there's been one benefit for businesses over the last two years during the global crisis, it's an increased focus on the essentials. More companies are eliminating unnecessary overhead by getting rid of the fancy offices, excess equipment, and superfluous expenses.
However, getting rid of the office isn’t necessarily a strategy that every business can utilize. Nevertheless, every business typically ends up with unnecessary spending through one of the following ways:
- Overstaffing for certain roles or tasks within the business
- Paying for unnecessary services / paying for higher subscription plan tiers than necessary
- Extending business hours beyond what’s worthwhile
- Poor efficiency in shipping and receiving
- Poor strategies & time management
As you can see, your business can quickly rack up its cost of daily operation in numerous ways. If you’re serious about increasing your profit margin, then it’s time to get very critical when it comes to the company’s strategies.
Implement a plan to observe the daily tasks performed by employees. If you have any persons on your team that are not essential, then you have the tough task of relieving that employee of their duties. In some cases, it can be more affordable to assign more tasks to an essential employee with the promise of increased compensation and a title change. However, only do this if it does not harm overall productivity and company efficiency.
If your business is open for 12 hours a day, but typically only sees worthwhile business during 10 of those, consider cutting your hours to avoid paying operating costs beyond what's necessary. Alternatively, you can close the business to the public for the remaining time and allow employees to focus on internal tasks if it helps you to better achieve your goals.
Finally, you must maximize your efficiency when it comes to your shipping department. The longer it takes you to ship an order out of your warehouse after a purchase, the more you're spending on overhead costs. Keep your business agile, improve your workflow, and trim the fat wherever possible. Effective e-commerce order management can streamline your operations, reduce unnecessary costs, and directly contribute to your profit margins.
Strategy 2 - Better Forecast Customer Demand
This strategy bleeds into what we discussed above in regards to shipping and receiving. If your company consistently finds itself with more product on hand than what's being ordered, you need to revise your forecasting strategy.
Not only are you paying for more product than you are selling, but you are also paying overhead costs to store that excess product until it's ordered. If you work in a business that deals with fresh goods and expiration dates, you're losing money to product you'll never be able to sell in time.
This can be a tricky issue to solve as you also don't want to be a brand that's continuously out of stock of in-demand products. A way to solve this is to provide customers with alternative ways to order products such as direct home delivery with free shipping. Customers then have a way of spending their cash with your brand and securing the product, walking away satisfied.
Ultimately, this all comes down to continuously refining your production process. You want to minimize the time between production and sale to be as minimal of a period as possible. It's also okay to keep some surplus inventory on hand for emergencies but avoid overspending as much as possible.
Strategy 3 - Cut Low-Margin Products or Services
Continuing on the topic of inventory management, we also recommend that company's cut any low-margin products or services from their offerings entirely.
It's a natural thing for companies to want to offer their customers a large and competitive selection of offerings. However, if you're not getting a worthwhile ROI when producing and supplying certain goods, then it's ultimately not worth the expense.
You will be better suited to utilize that effort and spending to further market and produce your best-selling goods or services. For small businesses, you will often find better success in specializing in a few offerings as opposed to being average in many things. You might lose a small number of customers in the process, but the math shows that the expense reduction is worth more than the minimal number of sales gained otherwise.
Strategy 4 - Cross-Selling and Upselling
Cross-selling and upselling are staples for increasing profit margins for good reason.
Cross-selling is the practice of selling additional products or services that have a direct relation to the product or service the customer is already purchasing. For example, if a customer is already in the process of buying a computer, you could attempt to cross-sell keyboards, mice, monitors, mousepads, and much more.
Upselling, on the other hand, is the practice of convincing a customer to purchase a more expensive, premium version of a product or service they're already set on buying.
While both focus on different aspects of sales, both strategies are meant to capitalize on individuals that have already tipped over to become buyers in the sales process. Consider two different customers at polar opposite ends of the buying process:
Customer A is simply learning about computers and prices available from various brands. He/she is likely looking for the best product and the best value.Your brand still needs to market to them and convince them to make a single purchase from you. If you suddenly ask them to pay more without initially persuading them, you're simply likely to make them turn away.
Customer B has already chosen your brand and added their brand-new PC to their cart. They already have their credit card in hand and are clicking through the checkout process.If you were to show them a slightly upgraded version of the PC or suggest some affordable, add-on products, they'd be more inclined to buy. To someone spending $100, spending $10 more often seems insignificant.
This is all a part of segmenting your target audience and marketing to them appropriately. Not only is upselling or cross-selling to the wrong person a fruitless effort, but you'll also end up spending more of your marketing budget than is worthwhile. However, if you target the right customers with additional offers, there's a great chance you can sell more with minimal effort.
Strategy 5 - Increase Your Prices
This is the strategy that typically scares company owners away, but it can often be a necessity.
Let's face it. When a business raises the price of its products or services, it's an inevitability that it will lose some customers that get priced out. It's even scarier if your closest competitors continue to sell at lower prices despite rising overhead costs for everyone.
However, a pricing change can also spell success if you do your research.
First, if you already have a strong customer base, a slight price hike is going to be unlikely to scare them away. Any price increase is disappointing, but communicating your reasoning for the change effectively can help quell any strife. Your hard work in nurturing and taking care of your best clients will be rewarded here.
“Some price optimizations were successful and others weren’t. But the ones that we communicated well were always value-driven.” – Yamini Rangan, Chief Executive Officer, HubSpot
If this isn't enough, consider any low-cost additions or upgrades you can add to your products or services to sweeten the value without adding much of an additional expense. If customers can correlate a price rise to more/better products or services, they'll generally be more agreeable to pay.
Finally, you can pivot your brand marketing to focus on highlighting the quality of your offerings. No matter your industry, there are always brands that can maintain a loyal following with the understanding that they are paying a premium price to engage with your brand.
Of course, price increases should ultimately be avoided if your research shows that the effect of the potential client loss outweighs the potential profit margin increase. Exercise caution with this strategy, but know that many brands continue to implement it to great effect.
What is a Healthy Profit Margin for My Business?
If you were to try and get a general answer for any business, you're likely to hear around 10%. However, this is not exactly helpful as typical profit margins vary greatly depending on your industry.
Thankfully, the NYU Stern School of Business provides us with the latest average profit margins in the United States as of January 2022 here. As you can see, gross margins can fluctuate by the tens, placing a much greater focus on the success of businesses in the same field as yours.
The general rule is that a sub-10% profit margin is low, with 10 being the average, and above 20 is exceptionally high. More importantly, the sign of a successful business is to see a steady increase in your profit margins each year that you stay in operation.
Conclusion - Boosting Profit Margins is a Constant Analytical Effort
All of the above strategies are regularly utilized by businesses every year to increase their earnings. Some of these tips are great rules to operate by for any business including cutting unnecessary expenses, accurately forecasting demands, and upselling customers when possible.
Further improvements to your margin will take closer analysis and testing to ensure the best results. While cutting unnecessary staff can help in the short term, you might also hurt performance or productivity if you find your company too short-staffed.
Finally, increasing company prices can bring in more revenue, but do so with caution. Create a careful strategy to support your price hikes as to not alienate the customers that allow you to stay in business. With the right data to back up your decisions and the right strategy to support them, you can add small percentages to your profit margins in several areas over time.