By Mckenna Gustafson, blog writer at TOP CFOS
Much has been written about how to increase your profit margins, but it’s a lot easier said than done. Here are a few simple tips that you can start implementing in your business right now to start seeing an increase in your profit margins.
Remember that it is important to increase profit margins directly by directly manipulating the variables that will affect your profit margins. When you improve your variables as the bottom line, you will see the results come through in your profitability.
Here are a few examples:
- Calculate your profit margin. It is impossible to increase your profit margins if you don’t know where you are currently. Analyze your findings and compare with other companies within your industry. Are you on track with other companies in your industry with your size? If not, do some digging and look for areas to improve.
- Increase your prices. It’s true- no one wants to have to increase prices for fear of losing customers. The truth is, it’s better to lose customers than to lose your business. With overhead costs constantly increasing, increasing prices can be essential to keep your business afloat. Research has shown that in many instances you can raise your prices by 5 or 10% without meeting any resistance from the market. This article cites research that proved that raising prices is the single most effective way to increase profit. Sounds pretty easy, right?
- Prevent fraud. Fraud can be one of the most expensive losses a company can face. Make sure you have the right checks in place to ensure that no employees are committing fraud. Implement internal controls and anonymous reporting systems so that you keep your money safe from those who could potential hurt you the most. Also, it’s a good idea to allow employees to share the responsibility to check each other’s work. Switch employee responsibilities frequently so all have the opportunity to make sure everything is running as it should.
- Don’t give discounts. Businesses don’t often realize how much discounting hurts their profit margins. If you are giving a 25% discount, how will that affect your sales? You’ll have to sell 33% more than normal in order to meet your sales goals. Like our friends over at Hubspot say in this article, giving discounts also leads to lower perceived value of your product or service. If your customers are seeing discounts, they start to think that your overhead costs are cheap and thus the product takes on a lower value in their minds.
- Consider the cost of acquiring a new customer. Acquiring a new customer can be pricey. Whether that means marketing, lunch invitations, or giving current customers bonuses for referring a friend, this is definitely something to consider. Take these numbers into consideration when analyzing your profit margins. What methods are the most effective and the best value for getting new customers? Consider focusing on these methods and get rid of less cost-effective strategies.
While these tips won’t fix your profit margins overnight, they can have an important effect on your business’s profitability in the long run. When you continue to practice these principles over time, you will see the results in your revenue.