Increasing sales volume is a significant profit driver for businesses, but it’s not the only way to earn more profit. Furthermore, increasing sales isn’t always a manageable strategy for small business owners and entrepreneurs who are just getting started, since it often requires a large inventory and hiring more staff. Let’s take a look at how you can boost your profits without selling more.
What is Profit Margin?
Your profit margin is the percentage of your turnover that you get to keep; it’s the margin by which your sales exceed your costs. So if you sell $1,000 and spend $600, your profit is $400, making your profit margin 40%. Bear in mind that average profit margins vary widely across industries and business models.
Low profits are bad news because they make it difficult to invest in growth and protect your company during difficult times. Many factors can cause low profits including:
High operating costs
Poor inventory management
Low customer retention rate
Many business owners believe that selling more is the answer to the problem of low profits, but that’s not always true. Several more efficient ways can help you increase your profit margins and make more money without increasing your sales volume.
Negotiate with Suppliers
Negotiating with suppliers can help you to reduce your expenses and thus create bigger profit margins. Shop around and speak to your suppliers about the possibility of bulk discounts or early payment incentives.
As mentioned, poor inventory management often plays a role in low profits. If you overstock a product that doesn’t sell fast, you may lose money over time due to depreciation, expiration, and misplacement.
Raising your prices is a straightforward way of increasing your profit margins. Underpricing your products to drive sales reduces your margins and makes it more difficult to cover your costs. Competing on price works well for big businesses because they can afford to focus on sales volume rather than high margins, but many small businesses will achieve greater success by focusing on quality, convenience, and excellent service.
Eliminate Unprofitable Items
It’s important to understand the gross profit that you make from a particular product or service. If an item is making you very little in terms of profit then it may be worth getting rid of it so that you can replace it with something more profitable, or simply streamline your selection for simpler inventory management.
Of course, you must weigh up profitability against sales volume. If you sell a very large volume of a product with a fairly low margin, it still may be worth keeping it.
Get Rid of Slow-Selling Items
Conversely, products and services with a very high gross profit margin are only actually profitable if they sell. Otherwise, they’re simply bulking up your inventory and tying up your assets. Reducing your supplies is an effective way of keeping your operating costs low and maximising your margins.
Systemising your business will help you operate at maximum efficiency and thus reduce your costs. This means putting clearly defined processes in place and using technology to automate many menial tasks to save time. Essentially, it means having your business run like a well-oiled machine rather than a slow, spluttering engine.
There are multiple ways to boost your profits without increasing sales, and many of these strategies may be better suited to the needs of a small business. Remember that it’s not about the money you make, it’s about the money you get to keep.