This article has 8 powerful tips to increase profit margins for small business. In fact, they will increase profit for any business, from the many solopreneur businesses through to larger enterprises.
I have been coaching businesses for the past 18 years and have helped hundreds of businesses to double their sales and profits. This article contains my simple checklist for how to increase profits in a company when sales are OK, but there’s not enough net profit coming out the other side.
So let’s start with a quick overview of the 8 tips and then dig into the details for each one.
Strategy #1. Increase Prices
I know, it sounds ridiculously easy.
In fact, it’s so easy that most people in business dismiss a price rise, thinking that, “my customers would all leave if I did that”, or even “it’s just not fair to increase the prices, I couldn’t possibly do that!”.
Yet whenever my clients have done this (and over 80% have used it as a strategy) their profit margins and bottom line profits have substantially risen, without losing any good clients.
Do the maths and work out what an extra 5-10% on your price would do to increase your profit margins. Because it’s all going straight into the profit of the sale, it makes every one of your products and services more profitable and this extra income goes directly to your bottom line.
You will be surprised at just how easily you can increase profits for your business.
On of the simplest ways to think about this is to price based on your value to the customer, rather than simply charging a fixed markup. For example, if you’re an accountant providing tax advice, you could charge based on the savings your advice is making for your clients. This is known as a value-based pricing strategy.
This is one of many tips to increase profit in my book, Double Your Business.
Strategy #2. Make Sure The Work Is Done Right First Time
Many companies that do projects provide a fixed-price quote for the job. But the projects often take longer than expected. As a result, the profit margin gets eaten away.
Problems like this can often stay invisible for years, because your quotes anticipate the work getting done on time. So what should you do if you find that your business is nowhere near as profitable as you expected it to be?
To get in control of this problem, you can use job sheets to track how well each job performs against your quotes. It might look something like this…
| Item | Quoted | Actual | Unplanned Costs |
|---|---|---|---|
| Gas Boiler | £1,200 | £1250 | £50 |
| Additional parts | £200 | £275 | £75 |
| Consumables | £50 | £95 | £45 |
| Labour | £320 | £480 | £160 |
| Total | £1770 | £2100 | £330 |
In the table, you can see a simple list of items for a new gas boiler installation. But this could just as easily be a house refit, a CCTV installation, or anything else where you quote the job before doing it. In this case, every item was under-quoted and the job took longer, so the labour was 50% higher than quoted. As a result, the job cost £330 less than planned and this hits the profit for the job.
If you’re not in control of your costs, you’re not in control of your profit.
It’s the first place to look if your business is not making the profit you are expecting, especially if you’re quite busy doing a lot of work. There is almost always a gap. Sometimes the gap is so big, you can be losing money instead of making it on every job. Sometimes it’s enough to pay for a nice extra holiday every year.
It can even be the difference between just surviving versus earning a really great income. This is even more true when your business faces tough times, like a recession or downturn in the economy.
Strategy #3. Renegotiate Your Major Overheads
While not commonly considered, most landlords would prefer a tenant on a lower rent than an empty unit. Get into a constructive negotiation with your landlord and see if you can reign in the monthly rent.
If you can’t cut your rent, have you considered buying your own business premises? This is a great way to create a new long-term asset for your business. While it’s an initial big outlay, it means that you can extract more money from your business because instead of wasting money on rent, you’ll be paying off a mortgage to buy your own commercial premises.
This is a very cool way to increase the real, bottom-line profit from your business. Even though it may not be listed as a bottom line profit increase, it’s actually money going into your own bank, rather than somebody else’s profits.
Marketing that works well is like a machine for getting new customers. If you are looking for ideas to grow your business, download my free book with 101 ideas to get more customers, sales and profit. Get 101 Ways To Get More Customers, Sales and Profit by clicking here.
Strategy #4. Change Suppliers and Eliminate Unnecessary Expenses
While this is a single strategy, there are really 3 ways to increase profit margins within this section.
Profit gets battered when your costs increase without reviewing the price you pay for products and supplies.
A hidden secret in many industries is the idea of volume discounts. If your business has grown substantially, you’ll find that suppliers will be willing to give you better prices because you buy in greater volume. The more you buy, the bigger the discounts you can expect. Greater spend gives you greater negotiating power.
To start reducing your regular outgoings, look through your typical monthly spend and identify the biggest bills. Who are the suppliers with whom you spend the most money? You may find that you can standardise more of your spending through single suppliers, to give you more leverage with them. You may also find that you can switch suppliers to find a better deal.
If you have a growing business, this is especially important.
The bigger you are, the more you’ll be spending with some of your suppliers. A good target to set for saving money on suppliers is to cut 10-20%. This comes from doing some research and shopping around a little, too.
The other thing to do is eliminate spending wherever possible.
For example, many business owners have software subscriptions for lots of different Software as a Service (SaaS) products for things like team communication, HR, project management, planning, social media management, online marketing tools and so on. If you’re not using this ‘software stack’ in your business, it can quickly add up to a lot of wasted costs.
Even if you are using them, unless you’re making the most of them, it can be smarter to stop if you need to improve your profits.
Of course, it’s not limited to just software costs. Do you have phone contracts that are no longer needed? Maintenance contracts for items you no longer have? Are you over-insured (many businesses are!). Do you belong to lots of membership clubs that you don’t really use, or from which you don’t extract a great deal of value?
The list is huge, so get to work.
Take a fine-tooth comb through your regular costs. Simplify your spending and save money wherever you can. Every penny that you save is instantly a penny more profit going directly to your bottom line. While this may be detailed work, it is exactly how to increase profit from your business without having to increase sales at all.
This trick of doing a cost review can save hundreds, even thousands of pounds every month, making a real difference to many small businesses.
Strategy #5. Sack Expensive Customers
You know the kind of customer that calls 3 times a week, spends half an hour moaning about your prices, fights every invoice, pays late and expects special favours? They’re costing you money.
Look at the profit per hour of your worst customers. If there are some that really not profitable at all for you, have a discussion with them to explain that you need to change the way you work with them.
You can either ask them to pay more, if you sell services. Or you can reduce the level of service you provide to them.
Another thought is to offer them different services via cross-selling, up-selling or down-selling into something that’s more profitable for you. How you increase profit from any given customer can be flexible – just make sure you’re not working for free.
Ultimately, if you’re selling products and services without any profit, you’ll rapidly get into trouble. To protect your gross margin, you must take action. Even if that action is drastic – and let these unprofitable customers go.
While this may seem difficult, it is even more difficult to explain to your staff that the business is losing money and that you will have to let somebody go. It’s an awful position to get into, so make sure you don’t suffer in silence. If you need to make more money from certain customers, deal with them one way – or the other!
Strategy #6. Use Processes To Eliminate Costly Mistakes
If you waste a lot of your time fire-fighting and dealing with issues, you are wasting a lot of time and energy.
Growing your business means being efficient and smart with your time.
Investing the time to systemise your business will mean that people know what to do, even when you’re not around to answer questions.
Systems eliminate mistakes before they happen, make life simpler for your staff and take the drama out of the day to day business.
They’re also a great way to increase profits; when you make no mistakes, expensive waste is eliminated, making you more efficient and profitable.
Strategy #7. Increase Sales Overall
Sometimes a business is not very profitable because the fixed costs are just too high for the volume of sales. Once you’ve trimmed your expenses as far as you can go, the next item on your “how to increase profit” to-do list is to make more sales.
There are hundreds of ways that you can increase turnover, grow your customer base, produce more sales and add to your profit margins. If making sales is a weakness for your business, developing a more commercial approach may be exactly what you need to do. Perhaps consider working with a business coach to help you develop strategies to increase sales and profits would be a smart move.
Strategy #8. Introduce A Higher-End, Luxury Product or Service
A clever way to increase profit margins in your business is to offer a luxury or specialist product that’s attractive to the top 20% of your customers.
Offering the best service and product in your business is a great unique selling point when it’s done well.
It’s what Apple do – selling just 10% of the global smartphones by volume, but picking up some 70% of the available profit. Less work, more profit, on a massive scale.
In terms of an everyday example, just think about car manufacturers.
They offer variants of their vehicles – a basic model and also luxury and sports variants. Even washing machines come in basic and top of the range models, with the differences being minor to their cost-base, while giving a massive lift to profit margins of the final products.
This allows them to increase prices further than usual, giving them better margins for the same basic product.
In fact, many businesses focus on the highest value customers completely and become highly profitable as a result.
How To Increase Profit Margins – Use A Simple Dashboard…
After following the tips for how to increase profits for small business, it’s essential to keep a close eye on your profitability. The best way to do this is with some kind of regular reporting. A business dashboard is exactly this.
You can use a dashboard to track important headline figures like sales revenues, gross margins, running expenses and so on with graphics.
The beauty of graphics is their ability to simplify the numbers, showing you quickly and easily what’s really going on inside your business. In this video, an Excel spreadsheet expert explains how to create a simple visual dashboard for your business.
If it’s a bit complicated for you, you could possibly hire an expert from somewhere like PeoplePerHour.com to help you. They’d probably be able to do a tailored version of this for no more than £75-£200.
Above all, to increase profit you have to do some work with your numbers. Your business can definitely increase profits, when you take just a little bit of action.
Marketing that works well is like a machine for getting new customers. If you are looking for ideas to grow your business, download my free book with 101 ideas to get more customers, sales and profit. Get 101 Ways To Get More Customers, Sales and Profit by clicking here.