Increasing the profit margins in your business is the 4th step in my 5 step system to increase sales, improve your profit and massively grow your business.
When you have worked hard to increase the number of customers buying from you, to increase the number of times they come back and to increase the average value of each sale, you need to make sure you are squeezing the maximum amount of profit from each of the hard won sales transactions.
To be successful in business, you need to have a firm understanding of your profit margins and how they affect your bottom line.
Let’s look at 3 strategies to increase the profit margins in your business.
Discounting is a popular tactic used by many businesses to increase sales revenue, but it is a strategy often rolled out through habit, and often without a great understanding of its impact on profit. Think about this example:
If your present gross margin on sales is 35% and you decide to reduce your prices by 10% through a discounting strategy, you will need to increase your sales volume by 40% just to produce the same profit as before. That’s not to make more profit; it’s just to get back to where you were before the discount!
Statistics show that only 15% of the market actually purchase on the basis of price alone. So if you can differentiate yourself in the market, perhaps by leveraging a Unique Core Differentiator to show why your products or services are worth more than those sold by your competitors, your sales could actually increase if you decided to increase your price.
What you offer may suddenly seem more valuable to your potential customers.
So increasing, rather than decreasing your prices could be worth further investigation for your business.
Identify low margin customers
In time business owners come to understand that not all customers are good customers, and being able to differentiate between the profitable and no so profitable customers is a great way to improve your overall profit margins.
If you discover that you do have low margin customers, what should you do about it?
Clearly you should look for ways to turn these customers into more profitable customers. But if that doesn’t work, my advice is to consider culling them, or better still, recommending they take their business to one of your competitors.
Getting rid of them may well reduce your costs with little effect on income. It will also free up time and resources to focus your promotions and customer service on your good customers. Asking customers to go away sounds like an extreme measure, but in the right circumstances it can most definitely be the best course of action.
Identify waste in your business process to improve efficiencies
Inefficiencies exist in all businesses and reducing them is an opportunity to improve your profit levels. Studies have found that waste can account for as much as 30% of the operating costs of a business.
Think about that – if your operating costs are $1,000,000 you could be wasting up to $300,000 in profit each year!
No industry is perfect and all businesses in all market segments can benefit from a waste reduction process but to reduce or eliminate waste it is important to fully understand exactly what waste is and where it can be found.
After years of work to remove waste, Toyota, the Japanese car maker, identified seven wastes as the most prominent ones in their business – overproduction, waiting, transporting, inappropriate processing, unnecessary inventory, unnecessary motion and defects.
In my experience, these waste types will apply to any business, including yours, not just car manufacturing.
Individually these 3 strategies will all increase the profit margins achieved in your business. Apply all 3 at the same time and you will turbo charge your results.
Do you agree with my post? Do you have other ideas on how to increase the profit margins in your business?
Post your comments below and share your ideas with the rest of our Business Coaching Club members.
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