How to increase margins
Increasing sales might make more profit for your business, but consider increasing profit margins, especially if sales growth is limited by your capacity. By boosting the gap between your cost of sales and the price your customers pay, you can improve margins and profit.
Increasing the prices of your goods or services seems the obvious answer when trying to improve margins. However, it’s critical not to put prices up when it will have a negative impact on sales. Think more along the lines of increasing some of your offerings by a very small percentage, say 5%.
If you manage this process well, informing your customers of a minor increase in prices of some of your items, they may not even notice.
Price sensitivity is the degree to which a change in price of a commodity changes the behaviour of consumers.
For example, a cafe who increases cups of coffee by a dime a cup probably won’t see any decreased demand as it’s too small to be noticed. However, if the increase is $3 a cup, you can imagine the huge drop in sales. There will always be a threshold where customers will switch for a lower price regardless of how great you are, especially for products and services where customers have a fair idea of the cost.
If you do sell items that are price sensitive keep your major products or services at competitive prices. Instead, think about increasing margins on supplementary products or services.
One example is a retailer who sells suits at competitive prices, but has higher mark-ups on ties, belts, cufflinks, and shirts. By encouraging customers to purchase some of these extras, the accessories provide the margin for the tailor.
Regularly check your prices
Keep a close eye on your prices, and those of your competitors.
Increasing prices is the easiest solution you can implement to increase margins, but it’s also the most risky if your customers are sensitive to changes in price. Before you increase the prices of most of your offerings, experiment to see what reaction you get.
Lower the cost of supply
The other main way you can improve your margins is by lowering the cost of supply – in other words, finding ways to pay less for any of the costs associated with bringing your products or services to consumers.
To achieve lower costs, consider:
- Sourcing raw materials from a cost-effective supplier.
- Purchasing in bulk if discounts are available, you have the storage space, and you don’t stock perishables.
- Importing – if your business can get similar raw materials or products from overseas at less cost, it’s worth looking into.
- Ensure you take advantage of any early payment or cash payment discounts.
- Taking steps to reduce theft and wastage – make sure your inventory system is efficient and links through to sales.
If you need extra finance to take advantage of bulk buying, take a look at our low-cost lending options.
Focus on larger margins
Concentrate on the products or services you sell that have larger margins – by selling more of these, your business will gain increasing profits. Train your staff to be aware of which items have the biggest margin and are therefore best to promote.
Likewise, begin to phase out goods that have low margins. If you’re selling plenty of them but not making much profit, it might be best to use that space or time for something more profitable.
Ensure these items aren’t loss leaders, meaning they’re used to get customers into your store with the expectation they’ll buy other products. For example, cheap milk might be used to get customers into a convenience store. The same applies to any business, regardless if you are selling products, time, technology or primary produce.
Other options for focusing on larger margins include:
- Changing your product or service mix – so your business has more offerings with greater margins.
- Promote items with the highest margins above those that have low margins. Sounds obvious but it’s easy to miss this.
- Practise the 80/20 rule where 80% of your profits should be coming from 20% of your goods or services that have the highest margins.
Try some new ideas
Target better clients
Change the customers you are targeting to ones that will spend more or who are less price resistant. They may be quite happy to pay a higher price for what you offer.
Consider only doing business with those customers that pay on time or don’t always want a discount. By not having to wait for your money you will enjoy higher margins by either paying less interest on any funding, or receiving interest on spare cash.
Attract new clients
Change your promotional messages to sell higher margin items, and make sure you have the staff able to sell (possibly needing to hire staff with a different set of skills). You can also open new locations or target new regions that have customers willing to buy higher margin products or services.