A successful business should have its profit margins continually increasing each quarter. So, it doesn't matter how many millions you make. If the profit margins have plateaued, it's time to take action. Operating profit (pretax) is the amount derived by deducting all business expenses from the sales amount, except for taxes and interests.
5 Tips to Increase Your Business Profit Margins
There are two profit margins that you have to track regularly; operating profit and gross profit. Focus on the profit margins of both and not just how high the numbers are.
Gross profit, on the other hand, is the amount left after deducting the cost of goods sold (COGS) from total revenue.
Profit margin is the percentage net profit calculated after all costs and expenses, including interests and taxes, have been deducted.
Before taking any steps to try and improve your business profit margins, it is essential that you understand your current financial situation. Why are your profit margins stagnant? Study profits for each product and service, for each week and month, and appreciate your current business patterns. If you can't spot your loopholes, you can't fix them.
Once you understand where your business is lagging, use the tips below to increase your profit margins.
1. Re-visit Your Business and Strategic Plan
If your business is making losses, the problem lies in its roots. Drag out that plan, dust it off, and start updating it to better your business. Keeping a business relevant in this era of growing technology is one of the most significant challenges that enterprises are facing. You may release a product today, be lucky enough to keep it booming for one year, then suddenly, there's competition.
This is why your business plan should be updated every quarter. As you go, keep researching and noting down how competitors are staying relevant. Do not fear to change your whole strategic plan if that's what it takes to keep your profit margins rising.
2. Review Your Products and Services
There's a chance that clients have lost interest in your products and services because there is a better product out there that beats yours. Most of these competitive products are almost similar to yours; they only have a little glitter added to them. If you are still making great sales, your customers are loyal, and they prefer what they already know and trust. This is good for them, but it's hurting your margins. Therefore, you will have to upgrade your products and services or integrate new ones to boost the profit margins.
Upgrading your products can deeply pin down your business if you don't exercise caution. First, test what your competitors are offering. With this, you can know why customers are flocking to their doors. Read their customer reviews and understand why they prefer their products to yours. After this step, you will know what your product is lacking.
You cannot compete with other businesses if you don't know what they offer.
When brainstorming on how to upgrade your product, remember that you cannot beat your competitor if you offer the same product. It does not matter how many years you've been in business. If your competitor comes up with a particular brand and everyone loves it, you will become the new kid in town if you produce a similar one. So, how do you go above your competitor? Upgrade their upgrade. They took your product and added some glitter to attract your customers; now it's time to return the favor. Take their product, upgrade it and draw their customers.
Be careful, though. It's advisable to conduct a survey and ensure that prospects and existing clients will welcome your new idea. After creating the new brand, hand out demos to a bunch of people. Do not worry about how much you'll spend on this; it's better to spend a bit and be sure than implement a whole plan that no one will bother about.
3. Upgrade your prices
In today's market, people are ready to run from your products and services in literally a minute. With high competition, you cannot afford to hike prices on the same old products or services. Upgrading your rates will only be appreciated by buyers if you integrate new products or enhance your current ones. People are willing to spend just where it's worth.
4. Try New Marketing Methods
You have upgraded your businesses plan, brought in new products or upgraded the old ones, and cautiously hiked your prices. What's next? Change your current marketing strategies. Before you do so, check how they are performing. You may find that there is high a demand for your product, but people do not know you exist because you are busy marketing where your audience doesn't go. Know what your target audience enjoys doing and advertise on those platforms. Try out digital marketing to reach more prospects at a go.
5. Stop Compromising
It is a great and failing misconception that your sales increase when you give offers, discounts, credits and such. Do not compromise. Feel free to lose the low-valued customers. You know them. Those clients who want to pay six months later, get crazy discount rates and get a bonus every time they purchase a product or service. Lose them. This is one of the most significant loopholes that are stagnating profit margins of small businesses. You look at sales, and they are over the roof, but the profit is below three percent, and you start scratching your head. Drop those clients without fear and allow yourself to attract clients who are willing to spend.
What you don't know is that most of these low-valued clients are willing to spend on products, but they choose not to because you let them. Update your company policy on purchasing products and ensure the words "NO CREDIT IS ALLOWED" are written in caps. If a customer wants a product, they should have money to purchase it, else, let them come back when they get money or be someone else's problem.
The five tips are meant to give your business a facelift. It doesn't hurt to try new things as long as they take your profit margins to the next level. Note that your company may need a few of these steps and not all, depending on what loopholes you find. Interested in keeping your business accounting in check to avoid low-profit margins? Contact TW Accounting & Business solutions and keep your business floating.