How to Increase Margins

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Increasing sales might make more profit for your business but consider increasing profit margins –especially if there is limited opportunity to increase sales.

Growing your business can be achieved by growing profit rather than sales.

First, increase prices

Increasing the price of your goods or services seems the obvious answer when trying to improve margins. And it is. Nothing will improve your margins more than a price increase (with the understanding a price increase could cause a drop in sales if you’re over-priced). 

However a price increase will always improve your margin. Try:

• Increasing your prices by a very small percentage, even 1-5%, will still generate improved results.
• Using an external event (such as a new tax change, the fluctuating US$ exchange rate) to justify why you’re charging more.
• If you do face increasing costs, customers often understand the need for rises.

Price sensitivity

If you have price sensitive customers, then consider the impact on sales that a price increase may have.

There will always be a threshold where customers will switch for a lower price regardless of how great your business is, 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 where customers are either not so familiar with the price or don’t compare you with the competition.

Second, lower the cost of supply

The other main way you can improve your margins is by lowering the cost of supply – 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 less expensive supplier if they offer the same quality. It’s easy to fall into a routine and always order from the same supplier. Consider every year (or two) to re-tender or seek new quotes from suppliers.
• 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 lower cost, it’s worth looking into.
• Ensuring 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, and there is less room for fraud.

Third, focus on larger margins

Concentrate on the products or services you sell that have the biggest margins – by selling more of these items, your business will gain more profit. Train your employees to be aware of which items have the biggest margin and are therefore best to sell if the customer is unsure. If you need to, allocate incentives or bonuses for selling high-margin items.

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.

Other options for focusing on larger margins include:

• Changing your product or service mix and giving customers more choices to buy high-margin items and fewer choices on low margins.
• Promoting items with the highest margins above those that have low margins.

Remember the 80/20 rule outlines that 80% of your profits comes from 20% of your goods or services. Make sure they are the high-margin products.

Finally, try these ideas

Target better clients

Change the customers you are targeting to ones who will spend more money 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 in cash, 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 financing or receiving interest on spare cash.

Are there any clients that cost less to service (such as closer to your location or don’t require on-going support)? Having more of these customers will lower your overall costs and, therefore, increase your margins.

Attract new clients

You could open new locations or target new regions where customers are willing to pay a higher price. If you focus on local consumers who are price sensitive, can you find commercial or government customers who may be prepared to pay more for what you do?

Review how you work

Some businesses are able to reduce their fixed overheads, such as replacing salaried staff with part-time or contracted workers. In addition:

• Assess if any staff can work from home, possibly lowering any lease costs as you’d need less room to operate.
• It could be possible to sub-contract any non-essential manufacturing to other businesses, to save you holding fixed costs or raw materials.
• The world is increasingly a global marketplace. What else can you source cheaper than your current supplier? This could be service tasks such as accounting services, subscriptions and training.

Summary

Realizing higher margins removes some pressure from sales because it means you can sell fewer products and services, or the same amount, and return a higher profit. Get in the habit of regularly reviewing your margins to make sure they haven’t changed due to creeping input costs or sales discounts. Repeat these strategies often to keep enjoying healthy margins in your business.

Next steps

• Contact one of our friendly Business Relationship Managers to see how we can help your business.
• Ask your suppliers to re-quote prices on materials, products or services to make sure you get the best price.
• Invest in quality accounting software to accurately track your sales, expenses and margins. Review financial reports every week or month.
• Speak with your accountant to explore additional ideas to improve your margins.
• If you plan to significantly increase your prices, consider selling to existing customers at the current price and charging the increase to new customers only.