10 Ways to Increase Your Profit Margins

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Many business owners think you need to increase sales substantially to make more money. But often that’s too difficult, especially in the short term.

Take, for example, the prospective client I met a year or so ago in difficulty.

He kept on and on about increasing sales to new customers. But I worked out that his average sale per customer and his prospect conversion rate were so low that he needed 3,750 meetings with prospective customers in the next year just to get back to breaking even!

There’s another way to make more money, which is to increase your profit margins. Same customers, same level of physical sales, same systems, no more staff or extra overhead costs, existing premises and capacity—isn’t that a thought?

Here are 10 tips:

  1. Figure out your gross profit margin:

Make sure you know your up-to-date, overall gross profit margin. It’s no good using estimated inventory figures or working from the figure in your last Annual Financials. Prepare some interim accounts to the last month-end from your MYOB accounting software. Using the inventory system in MYOB means there’s no need for a stock take. Get some benchmarking figures from your accountant. How does yours compare to the industry average?

  1. Analyse your profit margins

Your overall gross profit margin could be deceiving. Find out the gross profit margin on each of your products and services, and, in addition, analyse your gross margins over different business divisions, product categories, suppliers or customer categories according to your business. This way you can identify both low margin or loss-making items and profitable activities or products. Then you can stop selling low margin lines and focus on the ones that work.

  1. Increase your prices

Yes, I know it can be difficult. But often we business owners are more worried than our customers about price, and, let’s face it, our overheads are going up all the time. Yes, we might lose the odd customer — hey, won’t these be your worst customers? However, if your margin is 50%, a 10% increase in prices means you can lose 17% of your customers yet be no worse off!

  1. Review all your prices

Do you charge all customers the same price? If so, why? You’ll invariably find that some are less price sensitive than others, especially if they’re not paying for the bills themselves, e.g. government or larger organisations. Have you increased your prices to match supplier price rises and kept up with the competition?

  1. No discounting

Discounting can be the death of many businesses that don’t realise how badly this destroys your margins. At that same margin of 50%, if you discount your prices by 10%, you need a 25% increase in sales just to stand still. Say goodbye to your day off!

  1. Don’t compete on price

Differentiate yourself in other ways, whether by giving superior value, going the extra mile or reducing all the other (non-monetary) costs of doing business with you—effort, time, anxiety and emotional costs. See my blog on Adding Value Made Easy.

  1. Take cash discounts from suppliers

It’s normally a much better deal than trying to delay payment, even if you’re borrowing.

  1. Prevent theft

Whether stolen by staff, customers, losing cash is very costly. Do you have anti-shoplifting or theft prevention systems in place, even for staff? Do you balance your tills? Who does your banking?

  1. Watch supplier bills

Check these personally. After a while you’ll get a “feel” for things which aren’t right. Don’t be surprised to find that you’ve been overcharged for goods or services you haven’t received or been billed at the wrong prices.

  1. Use inventory systems

Use the inventory system on MYOB to keep track of your inventory. You’ll find you have less working capital tied in inventory, suffer less theft and stock obsolescence, know when you’re running out of products that are selling well, and know exactly how much each of your products cost you without wading through old purchase invoices. It’s easy, and it works well.

Increasing your margins is all about making the most of what you sell right now. As Jay Abraham, that fabulous US marketing guru would say, “Get everything you can out of all you’ve got!” And yes, buy the book of the same name; it’s a great read!

You might also like to read: 7 steps to a successful stock take.

Why you need online accounting

  • http://SmartFoxSecurity.Com SFoxSecurity

    Hi Nick,
    Had wanted to leave you a feedback here but couldn’t really get around to it since the last time I read your article. I find your article quite enlightening and I’ve written a follow-up article for my readers as well. It’s anoter dimension/spin off from your work. Take a sec to read it here: http://www.smartfoxsecurity.com/security-camera-can-help-your-business-increase-profits.html

  • Ash

    Finding cheaper suppliers whilst ensuring quality is maintained?

  • http://www.rock-solid-business-coach.com John Cameron

    Almost all company owners talk about growing their business. But there is a quote by Henry Ford: “If I asked people what they wanted they would have said faster horses.”

    What owners would really appreciate is a strong profitable company that consistently delivers value to their customers. To achieve this you need good margins.

    The alternative is to keep doing more and more business hoping to become profitable one of these years. They might have a faster horse but it’s not getting them anywhere except to more problems to deal with.

  • http://www.holisticmarketingmentors.com/5-marketing-trends-for-2014/ Increase Profits

    One of the things I have noticed over and over again with our customers is that they refuse to mark up anything. They want to give everything to their customers at wholesale. Only after I explain to them they are losing money with shipping, taxes and time to inventory the product do they increase it. We help wellness professionals with their businesses and their mindset is only helping people and not making money. Sometimes this mindset is difficult to change.

  • http://www.facebook.com/profile.php?id=732515808 Peter Bate

    I sometimes have problems working out gross profit margins, and always forget about taking tax into consideration. My personal favourite app I use to make it quick and easy to calculate is called Kalque GP for the iPhone. Check it out.