Were you aware that the average profit margin for businesses is 10 percent? Although they can vary slightly by industry, that is the goal you are aiming for. Businesses with a margin that exceeds that are outperforming the market, while those below it are at risk of failing.
If your business is struggling to make that 10 percent profit margin, you may fear the worst… but you do not have to because there are ways to increase profit margin.
Let us look at some of the best strategies to do this.
- Increase Profit Margin With Incremental Growth
A common mistake business owners make when trying to boost their profit margin is try to get radical returns immediately. That can only lead to bad business practices and cannot offer the kind of long-lasting results you need.
You need to have short-term goals. Those smaller goals will lead you to the larger goals you have for your business. If you can take incremental steps to improve your margin, you can better track your progress and see what mistakes you make so you can rectify them and avoid them in the future.
- Efficiency Counts
The better your turnaround time is from order to delivery, the lower your overhead costs per unit will be. If your overhead costs are lower, your profit margin gets a boost.
Look at the entire process to see where you can make it more efficient. If you find steps that you can eliminate, do so. You want to streamline the entire process and it can help to look for tools that can make that easier.
For car repair shops, for example, there is a tool to help you monitor labor: a labor guide markup. It gives you an idea of how long a particular job will take and makes it easier for you to increase or decrease the rates.
There are other similar tools that can allow you to mark labor rates up or down depending on a number of factors.
- Increase Average Order Value
When you have someone ready to shop with you, you want to do what you can to increase the value of their order. You want to maximize their spending.
An excellent strategy for this is upselling and cross-selling. Pair items together and offer products or services that are likely to be purchased at the same time. You want to use suggestive selling and relevant items or services that the person already interested in your business may be interested in.
If you have staff, train them to upsell and be sure that your systems and processes highlight opportunities to maximize additional sales.
- Prioritize High-End Products or Services
When businesses start seeing their profit margins narrow, they try to sell as much as they can, disregarding the kind of profits they may make from those products or services. That is a mistake. It takes as much effort to sell a high-end option as a more affordable one, but which one will bring you the most profit?
You want to focus on boosting your high-end products and services. Not only will this increase your profits more easily and more rapidly than the lower-end products, but they are also proven to be better at increasing client satisfaction.
For businesses that have clients which produce the profit, you want to assess which ones are actually increasing your profit and which ones are not. You may find that some clients are negative margin clients so they actually cost you money to keep them as clients. You want to cut these to improve your margins.
- Increase Your Prices
This is one of the simplest ways to increase revenue. If you see that you are selling consistently and still not improving your profit margin, it can mean your products are priced too low.
You want to look at competitor pricing, the cost sensitivity of your customers, and even the economy before making a decision to increase rates.
This decision can also require that you think of the kind of customer you want to attract. Do you want customers that will purchase from whatever business offers the cheapest rates or customers who do not base their purchase only on price?
When you increase rates, you want to find creative ways of doing so. You may want to go with tiered pricing or bundles. Find ways of adding extras that cost you little and can make the customer feel like they are getting something more for what they are paying.
- Reduce Waste
If you find that you are losing a lot of inventory to spoilage or you end up with too much inventory on your hands that you are not able to sell, you want to know what the issue is.
Are you ordering too much raw material or is your product selling so slowly it becomes obsolete? Perhaps your distributing channels are not as efficient as you need them to be. Look for the cause of the waste.
You want to reduce your overhead as much as you can and automating tasks can help you manage this. You will reduce overall costs and have a much more efficient business.
Some tasks you can automate include:
- Inventory management
- Scheduling appointments
- Employee benefits
- Background checks
- Lead generation
With all of the services and software available, you can lower labor costs or you can place those employees to work in other areas to improve your business’s efficiency.
Improve Your Business With the Right Strategies
There is no reason to have a business struggling with its margins when you can increase profit margin with the right strategies and tools.
Read more about how to improve your sales in Business section!