Stop spending long hours stressing over how to increase profits in your business. Owners need to realize that there are only five areas of their business that they need to focus on to drive profits. Profits can be dramatically increased by small increases in each of the following: 1) lead generation, 2) conversion rate, 3) average dollar sale, 4) average number of transactions, and 5) profit margin.
Of the five areas, the most immediate lift to profits can be achieved by focusing on the business’ profit margin (defined as total expenses divided by total revenue). Directing your focus to increasing your profit margin is the most cost effective way to increase profits. Lower your expenses and that savings goes to profits before taxes.
Consider Increasing prices: In addition to reducing costs, consider increasing prices. I speak with many business owners who assert that they can’t raise their prices. I am not suggesting a dramatic increase in prices and not on your high volume products, but rather a small increase on your other products and measure the impact. We worked with a hardware store whose owner was absolutely convinced that he couldn’t increase prices. Fortunately, he listened to us and raised prices by a nominal amount. What he found was that while revenue declined, profits increased (# 1 focus should be profits) because his “D” clients, who “nickle dimed him”, left and those who remained were his core customers.
Reduce Expenses: In addition to modest price increases, look at reducing your expenses. We have over 60 strategies that have proven successful in helping to reduce costs. Here are a few of my favorites.
1. Stop discounting across the board. Instead of reducing your prices to obtain business think about ways you can add value. Give prospective clients something that has a high perceived value but low cost.
2. Stop spending time with your “C” and “D” clients. Have you classified your clients into tiers? If you have not, begin doing so immediately.
“A” clients are Awesome – never complain about price, always a joy to work with
“B clients are Basic – rarely complain, fun to work with and don’t take much time
“C” clients are Can Do With or Without – move up to “B” level or move out
“D” clients are Dead – move them out or at least charge a higher fee – give them to a competitor
3. Negotiate costs with your suppliers. When was the last time you asked a supplier to reduce the price they charge you? During one of my presentations on this topic, an owner in the audience texted his largest supplier and was immediately given a 3% discount on all future purchases. That savings goes right to the bottom line.
4. Do it right the first time. Are you having to revisit and spend time and dollars with clients having to redo work that your crew improperly installed? Better trained crews and teams reduce the need to spend time redoing work that was incorrectly installed.
5. Take your largest cost categories and reduce each category by at least 10%. This will probably require that you dive into each category to better understand where the money is being spent and what can be done to reduce the expenditures.
Helping business owners increase their profit margin by either reducing expenses or strategically raising prices are just a couple of our 60+ profit margin growth strategies. Experience teaches that just by focusing on your costs you will reduce costs. Once you begin looking into the details you may find much potential to lower your costs. A note of caution however, history is replete with examples of business owners who in an effort to reduce costs adversely impacted revenue generating assets or process – meaning sales and marketing.
Determined not to live the life of a farmer as recommended by his father, Frank applied as a clerk in a general store in Watertown, NY. The year was 1873 and in a post Civil War economy Frank was fortunate to find the job. One day Frank encouraged the owner of Augsbury & Moore Corner Shop to put obsolete and slow moving items on a table out front and sell them for 5 and 10 cents.
Frank recognized that it was better to receive some cash for these slow moving items than to hold on to them indefinitely. The formerly slow moving items were rapidly purchased, proving the validity of Frank’s premise. After a second similar success Frank and his brother Sum started their own store and named it F. W. Woolworth’s.
As he was growing what was to become one of the largest retailing businesses in the world Frank looked for strategies to keep his costs low. One of his successful strategies involved banding together with other retailers to buy in bulk. With the larger volume the combined group began purchasing they demanded, and were granted, price concessions from their suppliers.
Here are two great examples of strategies to increase your profit margin…get money for slow moving inventory and reduce costs by increasing purchasing power.