If your profit margins are lagging, it may be time to give some more strategic forethought to how you’re approaching both the revenue and expense sides of your balance sheet.
4 Ways to Boost Profits
Profit margin is basically the amount of money that’s captured and kept from the revenue generated from business activities. And while there are multiple types of profit margin – including gross profit margin, operating profit margin, pretax profit margin, and net profit margin – they all tell you similar things about your business. At the end of the day, a higher profit margin is a better profit margin.
Your profit margin is your company’s lifeblood. A high profit margin gives your business every chance to enjoy sustained success, whereas a suppressed profit margin puts you at risk of going out of business in a matter of weeks.
Whether you’re looking to improve an already healthy profit margin, or you need to dramatically elevate your profit margin just to stay afloat, here are several helpful ways to accomplish your goal:
- Switch to Value-Based Pricing
Most pricing is arbitrary. Companies simply study what the competition is charging and then price their products similarly (or slightly lower) in order to be competitive. But this isn’t necessarily the best approach. You may be better off using a value-based pricing strategy (also known as customer-focused pricing).
“Companies that follow this strategy base their prices on customers’ perceived value of whatever is being sold,” Harvard Business Review notes. “When the customer perceives that a product or service has a high value, the company can charge more for it without fear of potentially alienating the buyer. When a customer perceives that a product or service has a low value, however, the amount the company can charge is constrained.”
The key to value-based pricing is to communicate value. In other words, you may have to invest more time, money, and resources into marketing, branding, and even customer service. However a value-based pricing model typically means fatter profit margins by the time it’s all said and done.
- Reduce Key Costs
Study your balance sheet and highlight the most expensive items. Which expenses are having the biggest impact on that side of your balance sheet? This will obviously be different for every business. However, the easiest way to identify your key cost areas is to think about where your team spends the most time. Hours equal dollars – use this as your guide.
Companies with fleets, for example, tend to spend a disproportionate amount of money on vehicle maintenance. Thankfully, there are ways to quickly lower these costs by using something like fleet maintenance software to streamline things like inspections and maintenance.
- Change Your Approach to Payroll
Review your payroll and look for opportunities to get creative. If your entire team is paid on a fixed salary, you may be able to lower payroll costs (or at least boost profit margins) by switching to different models. Options include transitioning sales folks to commission-based salaries, offering performance incentives instead of straight bonuses or raises, or even hiring independent contractors instead of full-time staff.
- Focus on Customer Retention
Most businesses are extremely focused on customer acquisition – and rightfully so. (If you don’t acquire customers, it’s impossible to run a successful or profitable business.) But customer acquisition is expensive. And if an established business only cares about acquisition, profit margins are going to be much lower than they should be. Customer retention should be just as much of a priority.
Acquiring a new customer costs roughly five-times more than retaining an existing customer (on average). If you can find a way to increase your customer retention rate by just five percent, you can expect an increase in profits of 25 to 95 percent. (Yes, you read those numbers correctly.)
Give your business a boost in the profit margin department by focusing on satisfying and keeping customers. It’ll require a little more work on the front end, but the long-term benefits justify the added investment.
Take Control of Your Balance Sheet
Are there uncontrollable factors that impact your balance sheet and profitability? Certainly so. But this shouldn’t deter you from doing what you know you need to do. Because despite the challenges, you have more influence and control than you realize. It’s up to you to control what you can control and to leave the rest up to fate. Start with the items listed in this article and go from there.