The majority of businesses exist to make a profit.
However, profit is only earned at the very last step, after you’ve made all of your sales, covered all of your costs, done all the work and paid all of your staff. As a Business Coach, I know that business owners often feel overwhelmed, wondering how to find ways to maximise that profit margin gap.
The most common “go-to” approach is to just increase sales.
However, in reality, this is a difficult way to boost profit margin, especially in the short term. After all, a company can bring in millions of dollars in revenue each year but still be unprofitable.
A smarter, more sustainable way is to scale and increase profit and revenue, by focusing on your profit margin percentage.
In this blog, I’ll show you how you can increase your profit margin using these three simple strategies.
What is profit margin?
Profit margin indicates how much profit has been generated by your business’ earning activities by dividing income (revenue minus all costs) by revenue and expressing this as a percentage.
The higher the margin percentage, the more profit-earning potential your business has.
Your business’ profit margin reflects your ability to drive revenue and manage expenses, so investors use it as a basis of comparison when determining which organisations to invest in or buy.
Understanding how to effectively increase the profit margin of your business is crucial if you want to grow, scale and sustain a profitable business.
3 ways to increase your business’ profit margin
As a Business Coach, I advise my clients to apply these 3 simple steps to help them increase their profit margin:
- Strategically increase your pricing.
This first step is often what most business owners refuse to do because they’re worried that they’ll price themselves out of the market or their customers will feel offended.
It’s completely understandable why. While raising prices can substantially boost your profit margin, pricing models can also be contextual and there’s no one-size-fits-all approach that any company can just apply to get the results it wants.
So, my suggestion is to conduct extensive market research and competitive benchmarking. You must build your understanding of your buyer personas and be prepared to ride out the tides of trial and error to discover the best pricing models that will work for both you and your customers.
However, raising your prices into the perfect “sweet spot” can really improve profit margins – so it’s worth the effort.
- Analyse your products and services, then rank them by their profit margin.
From here, make sure that your marketing plan and sales processes are working towards selling more of your higher-margin options. These products or services don’t have to be your most expensive – they could actually be the ones that take the least time and resources to produce.
Generally speaking, the faster you can turn a product or service around from order to delivery, the lower your overheads and the faster you will be able to generate revenue. In other words, the fewer steps, and the faster you can complete them, the more you can increase your business’ profit margin.
- Rank your clients into three categories and focus on the right ones.
Smart business owners take the time to fully understand their customers, and know who to pursue and who not to.
My suggestion is to rank them all into three categories:
- Customer A – These are your most ideal customers. They are loyal, see you as valuable, gladly accept your prices, pay on time and collaborate smoothly with you.
- Customer B – They are your typical customers who work routinely with you and are happy with your service. However, if you nurtured your relationship with them and offered more value, they could turn into Customer As.
- Customer C – These are the customers who never appreciate the work you do and are exceedingly difficult to transact with. Customer Cs are those who call you three times a week, complain about your prices, fight every invoice, pay late and expect special favours.
Knowing your customers and being able to classify them will enable you to focus more on those who bring more profit while you let the unprofitable ones go.
To learn more about understanding your customers, have a read of my previous blog where I breakdown the Customer Loyalty Ladder.
Do you need help increasing your profit margin?
A higher profit margin is always an objective to strive for.
However, you must first provide more value to your customers to increase their willingness to choose you over and over again. This additional value can then lead to more referrals and long-term customer loyalty, both of which will improve your profit margin potential.
As a Business Coach, I work with business owners like you to guide you in achieving your business goals and increasing profitability.
So, whether you need help assessing your profit, drawing up a new financial plan or simply improving your existing strategies, I’m always here to help.
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