If two shoe retailers sell the same number of shoes at the same price, what would make one of them earn more profit than the other?
Simple – Their profit margin.
Increasing the profit margin of a business is the easiest way to increase the business’s profit.
However, many small business owners put in more effort into increasing their sales without optimizing it to bring in more value per sale.
So, they work very hard to get so little.
This article will show practical strategies that would help you increase your profit margin without increasing your prices.
What Is Profit Margin?
Profit margin is the percentage of profit that your business earns from the revenue it generated.
It tells you how much goes into your purse as a business owner.
For every N1000, your business sells, the portion of that money that your business takes as profit after your expenses are deducted is your profit margin.
It is calculated as (Net Profit/Revenue) * 100
Four (4) Strategies To Increase Profit Margin Without Increasing Price
Price increment the most popular way small business owners know to increase their profit margin, this can be dangerous and cause the loss of sales and customers if they are not carefully applied.
The alternative strategies shared below would help increase and sustain your profit margin without the dire consequences of a poorly executed price increase.
1. Prioritize Products With Better Profit Margin
You should start by assessing the profit margin of all your products and services.
This would help you determine which product contributes little or no profit to your business and which ones brings in more profit.
After categorizing your products into these two categories, you should evaluate the products or services for the following factors:
a. Are these products loss-leaders you’re using to lure customers to buy from you or serve any other strategic objective?
b. Can you improve their profit margins by reducing their costs or increasing their sales?
If your answer is no to both, you should consider dropping those products or services from your offering.
You can also, opt to introduce more products with better profit margins as you phase out those with poor profit margin if they don’t serve any strategic goal.
2. Negotiate Lower Prices
If your business can retain 100% of the revenue it brings in as profit, it will put your business in a great place.
But we know that is not possible, because there is always cost to be incurred.
What helps, however, is trying to reduce that cost of producing or distributing your goods to customers.
The lower the cost, the higher the percentage of revenue your business earns as profit.
So, to increase your profit margin, you should look for ways to negotiate lower prices from suppliers, logistics companies, etc., by consolidating your orders, asking for discounts, buying in bulk or signing long term contracts.
3. Avoid Product Markdowns
A product markdown occurs, when the original price of goods and services are reduced because you can’t sell it at its original price.
Say you sell a pair of shoes for N8000, if you reduce it to N7500, you’ve marked down your product by N500.
This will reduce your profit margin for those shoes.
Instead, you should:
a. Try to create more perceived value for the product.
b. Improve your inventory management to prevent leaving products in stock until they are near the expiration date. Which would make you sell them at a giveaway price.
4. Improve Your Efficiency
You’ll find that the more efficient your business is, the more its profit margin would improve.
For clarity, efficiency means that your business should accomplish more with less.
To improve your efficiency, start with how you manage your business.
Make sure you’re operating a lean business model, that makes you focused on cost-efficiency.
If your business adopts technology and business automation, it would be able to accomplish more results in less time, effort, cost.
An improved profit margin means a lot to a small business.
It increases your chances of growth, it places your business in a better position compared to your competitors with lower margins, it ultimately means additional money in your purse for the same effort.
Implementing the strategies shared above would help your small business capture more value for your efforts.
Now, all you have to do is just implement them.
If you need help to improve your small business’s profitability, sales or revenue, you should talk to our SME Coach.
The SME Coach has years of practical experience and an industry network you can leverage to accelerate your small business growth.