This post explores the five ways to improve profit margins.
I spent 10+ hours studying the drivers of profitability and collecting data so I could get the information to you accurately.
So if you want to find ways to improve your profits, this post is for you.
Oh, and I'm not going to waste your time, I’ll get straight into what you need to know.
Let's dive in.
5 Ways to Improve Profit Margins
The five ways to improve profit margins are:
- Increase prices
- Focus on profitable business
- Reduce direct costs
- Reduce indirect expenses
- Lower overheads
I would suggest focusing on them in that order too.
You are going to find more opportunities to move the needle by focusing on prices, profitable business and direct costs than by fretting over indirect costs and overheads.
Here’s how you can increase the profit margins your business earns:
1. Increase prices
Your first option is increasing prices. You can:
- Increase prices for new customers, or
- Increase prices for new and existing customers
The beauty of price increases is that they fall straight to the bottom line.
Your business does not take on any additional expense when you simply change your prices. That’s because changing the numbers on your price boards, price lists or quotes costs you nothing.
That means if you increase prices by 10% for a $500,000 business, you will make an extra $50,000 in revenue AND profit. It’s the beauty of price increase and why it ranks as the first option.
If you decide to do it, you can start doing it immediately too.
Even better again, if you increase prices for existing customers you can turn some low profit or unprofitable current customers into profitable customers, or encourage less profitable customers to find a new landscaper. Both wins for your overall profit margin.
2. Focus on profitable business
Take a look at your business and answer two sets of questions:
- Which customers are the most profitable? Which are the least profitable?
- Which products and services are the most profitable? Which are the least profitable?
Now that you have a list of customers and services by profitability, you can:
- Focus on selling to more profitable customer types
- Find ways to remove less profitable customers from your customer list
- Focus on selling your more profitable products and services (or upsell higher margin ones)
- Discontinue or deprioritize less profitable products and services
If you can find a way to make improvements across these four areas, you will have a more profitable business overall, and it will be less work. That’s because you have removed customers that take a lot of effort to serve, but deliver little in profit to you.
Shifting your focus to increase the amount of revenue you generate from more profitable customers, products and services, while reducing the amount of work on your less profitable ones is a big win for your profit margins.
3. Reduce direct costs
There are a number of ways to reduce direct costs.
They boil down to either reducing the volume of inputs you use (e.g. raw materials or labor hours) or finding ways to lower the price you pay for those inputs.
Ask yourself these questions:
- Are you optimizing employee rostering?
- Is there a way to increase employee productivity?
- Can you improve processes in ways that will save time?
- Can you deploy equipment or technology to speed up manual tasks?
- Can you reduce the raw materials used to deliver your product or service?
- Is there any wastage of raw materials in the production process?
- Will suppliers offer volume discounts or renegotiate terms?
Depending on your answers, take action accordingly.
You should be constantly keeping track of all your inputs, making sure they don’t grow out of hand, there’s no wastage and that you’re getting the best deal from suppliers.
4. Reduce indirect expenses
I’m a big advocate for keeping an eagle eye on costs.
All business owners should be looking to trim indirect expenses on an ongoing basis. But again, you want to be focused on the ones that move the needle.
Here I think the focus should be on sales and marketing. However, not just reducing expenses, but also making sure sales and marketing efforts are focused on the right areas:
- Improve sales efficiency: It’s likely that as the owner you spend a lot of your time with customers. Signing up new ones to your business and keeping existing ones happy. You might even have a full or part-time sales person. It’s important to use this time wisely. Channel all these efforts into Idea #2 and focus on winning profitable business. Track your time and make sure it’s going into the best uses.
- More effective marketing: You likely run a number of marketing campaigns with different levels of effectiveness. Take some time to find your best marketing channels, the ones that get the most leads at the best cost and double your efforts on these channels. Consider cutting down on the other, less effective channels.
- Lower sales and marketing expense: Review all the time and effort put into sales and marketing. Review all the marketing campaigns you are running. What’s working for your business? What’s not? If it’s not working, consider reallocating those resources or simply cutting them and pocketing the savings.
5. Lower overheads
Managing overheads is mostly a matter of discipline and good housekeeping as you operate your business year after year. To keep your house in order stay on top of the simple tasks like:
- Keeping usage of business supplies and services under control
- Making sure you get competitive quotes for the business services
- Reducing the time it takes to complete administrative tasks and
- Canceling any costs that you no longer need
To help you out, I have a post with two valuable exercises to manage costs.
Improving profit margins is a great way to generate more cash flow from your existing business, without having to grow it. The fact that you are interested in exploring this exercise is a great sign and I hope you are taking away some ideas for your business.
It means you are thinking about the right issues and that you are considering the options available to improve your business.
Did you know? With some simple changes the average business can grow revenue by 10%+, improve margins by 5% and generate tens of thousands of dollars in extra earnings per year.
What would that mean for you?
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