1. Lower the cost of supply
One way to increase your profit margin is by lowering what you pay other businesses for raw materials, inventory, or any component of what you sell. There may be a number of your suppliers that are willing to re-negotiate your terms of trade or costs to help reduce what you pay.
You could identify your top five supplier expenses and determine if you could:
- negotiate lower prices
- take advantage of discounts through buying in bulk
- receive a discount for early payment, or instead establish if you can pay later
- minimise any waste from production
- take steps to reduce theft
- incentivise staff to find ways to reduce costs.
It can also be a good idea to identify efficiencies, such as speeding up output, introducing lean techniques, and tightening slippage from products being stolen, broken, or returned. Doing this could help lower the cost of production and therefore increase your margin.
2. Sell more high-margin products
Concentrating on promoting and selling the products and services that have the largest individual margins in your business could improve sales and improve your overall margin. Similarly, you could begin to phase out anything with a low margin or switch to something more profitable.
Other options for helping sell higher margin products might include:
- introducing new products and services that have higher margins
- profiling items with the highest margins
- developing premium products or services
- training staff to cross-sell and up-sell
- targeting higher paying customers
- targeting less price sensitive customers who are used to paying more.
3. Review your pricing
If your margin has been impacted by your pricing, and your margin is lower than what is viable for your business, you may need to reassess your pricing. This may not be as hard as it sounds, especially if you have items with low price sensitivity where customers don’t mind as much if prices rise, within reason. Keep in mind to price for the market you serve, to ensure this is the right strategy for your particular business.
You do of course need to weigh up the benefit of a price increase with upsetting existing customers who feel an increase isn’t justified, or the possible loss of a customer who thinks you’re too expensive. If you’re looking to increase pricing, you need to consider how you communicate this clearly and the reasons why to your customer base.
Price increases don’t always need to be large to make a positive contribution to your bottom line either, as even slight changes could have a big impact on profit. You could use your sales data within your accounting software or sales systems to establish which products and services sell the best, and then review your pricing strategy to help decide if they could handle a price increase.
Ways you might review your pricing strategy could include:
- comparing your prices against competitors to see what you could increase
- identifying products where you have exclusive rights so you can charge a premium
- contacting customers to determine if raising prices is possible.
Combining all three of these tactics can help improve your profit margin, as the impact of small changes can snowball when used together. From negotiating better terms with suppliers to nurturing your most valuable customers, you may be rewarded with increased profitability and steadier cash flow which will help make your business more resilient during the tough times.
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