5 Simple Ways to Increase Profit Margins

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5 Simple Ways to Increase Profit Margins

It’s the moment all small business owners dread – the realization that costs are up, sales are down, or (gasp!) both. No matter how minor the drop is, decreased profitability can cause you to panic, lose sleep, or worse: you might even be tempted to offer crazy discounts and/or make regrettable staffing cuts.

Just hold on.

Before you do anything drastic, remember that regardless of your situation there are always ways to boost your profit margins. And you don’t have to blow out inventory or fire employees to do it. Without further ado, here are five simple ways to increase your company’s profitability.

Increase Prices. It may seem obvious, but many businesses with waning profit margins simply don’t consider price hikes. We’re certainly not recommending you increase the cost of each and every item on your shelves, but it’s a smart idea to add a few dollars to your most popular or more exclusive products. While it may be difficult to ignore the constant price wars between big-box retailers, there are also benefits to higher prices; for example, “prestige pricing” can create the illusion of greater value. For more pricing tips, revisit our blog post from August 2015.

dreamstime_s_21272686Narrow Your Focus. Take a look at your inventory and see how long some of the items have been sitting on the shelves. If you find that you’re selling significantly more of one particular product (or brand) than another, it might be beneficial to revisit the Pareto principle, aka the 80/20 rule (ie. 80 per cent of your profits may be coming from 20 per cent of your sales – or close to it). While it may take a bit of time to comb through your sales reports and overstock, regularly checking your inventory is a great way to determine what your customers are buying (as opposed to assuming what they’re buying). As a result you will have fewer products collecting dust and higher profit margins.

Avoid Discounts. While regular sales and steep discounts will definitely attract customers, they can also send the subtle (or not so subtle) message that you are desperate or struggling. At best, people will wait to shop at your store until the next flash sale. At worst, they’ll steer clear altogether. After all, you’re not targeting customers whose primary concern is price; for those shoppers, there’s a big-box retailer down the road. Although people love to save a few dollars every now and then, decreasing prices every time your sales dip will have a negative effect on both your reputation and your bottom line. There are far better ways to attract (and keep) customers than selling yourself short.

Re-evaluate Certain Costs. You have employees for a reason, and there’s a good chance they all have some free time during their shifts. While traditional retailers use lulls as an excuse to send staff home to cut costs, we consider that short-sighted. Instead, we recommend taking advantage of the slow times. Isn’t it better to delegate duties like window washing, inventory display and stockroom organization than having to do it yourself? As a small business owner, you know better than anyone that time truly is money – especially your own.

Add Value With Bundles. One way to increase profit margins (and also provide a competitive advantage) is to combine products and/or services into special bundles. For example, if a customer orders a certain amount of paint, you could offer a discount on your painting or design services. Even if the product or service you’re offering is one they didn’t originally consider, the discount may be enough to entice them. Since it’s typically more cost-effective to retain a customer than it is to attract a new one, up-selling and providing exceptional service is a great way to increase your profit margins – both now and down the road.