Increase Profits by Focusing on Profit Margin
I’m not sure how to increase profits, and effectively manage profit margin. I don’t want low-margin sales and don’t want to sell low-margin products. But it’s hard to turn down opportunities from clients that have work for us.
Thoughts of the Day: Take a look at your mix of business overall. Having a mix of prices and margins can be good for business. Figure out how much selling effort goes into getting a customer and what does low-margin work play in bringing in new customers. Find an alternative distribution route.
Create a grid to analyze what’s going on with profit.
Create a grid of all products and/or services that you sell, one column for revenue, one for gross profit dollars, one for gross profit percentage, plus columns for number of selling costs, new customers, total customers and percentage of total sales.
- Use this grid to analyze what’s going on in terms of quantity, price and profit.
- Carefully analyze all low-margin items to be sure you fully understand and have allocated all costs.
- Be sure that even your least profitable items contribute something toward the bottom line.
Make sure that any low-margin work that you decide to stick with is relatively easy to produce and has few, if any, variables. Control the margin by making this service or product “cookie-cutter” work — every item produced looks the same, is produced the same way and gets delivered the same way.
Build up profit margin by creating an up-charge for customization and special handling.
The same goes for rush jobs, items requested in smaller than normally offered quantities, alterations and out-of-season orders. In other words, exceptions cost the buyer more and serve to drive more profits to your bottom line. Willingly and gladly supply the kid-glove special treatment that some customers desire. Make them pay extra for it.
Find creative ways to increase your profit margin. Offer buyers combination packages by putting a low-margin item together with a high-margin item. Consider slightly discounting the package price, if necessary, to attract the middle-of-the-road buyer. In the process, get your average buyer to increase the overall size of the order, purchasing more quantity because they got a “deal.”
Make sure your customers know you have more options to offer.
When someone asks for or clicks on a low-margin item, be sure to show them something a bit more upscale and point out the enhancements of the higher-margin item. You never know when a customer will bite on something that they perceive to be a superior solution, even though they first contacted your company looking for a low-price option.
Be sure to include selling costs when calculating the relative profit of each product or service that your company offers. It’s imperative that the low-margin products at a minimum cover their selling costs so that your company doesn’t take a loss. In some cases, owners have been surprised to find out that higher-margin services and products, with a demand for hand holding, don’t make much more than the lower-priced, lower-margin cookie-cutter items.
Take a look at the role your low-margin items play in bringing in new customers.
As they say, variety is the spice of life. As long as you’re actually making a profit on every item that you sell, low-margin work can fill one or more needs, from acting as a loss leader to bring in new customers who want to test the waters to filling in revenue or profit hole, to keeping things busy in slow periods.
Look for a wholesaler who might be willing to buy your low-margin materials and resell them. Eliminate the cost of handling lower-volume, low-margin customers by making them someone else’s problem. Let the wholesaler figure out how to make money on the items.
Looking for a good book? Try “Managing Customers for Profit: Strategies to Increase Profits and Build Loyalty” by V. Kumar.