3 min read
Balancing your costs and sales is the key to running a successful business. Yes, a good marketing strategy helps grease the wheels and much can be said for it, but profitability is everything. Because if it’s not profitable, a business can’t grow.
Managing and improving your profit margins is key to improving profitability. Here we take you through a few ways to boost those margins without sacrificing your offering. Let’s begin with the basics.
What is a profit margin?
A profit margin is the difference between what your business earns and what it costs to run. There are three kinds of profit margins:
Gross profit margin – The difference between total revenue and COGS (cost of goods sold) divided by the revenue and multiplied by 100 to give a percentage.
Operating profit margin – The same as gross profit margin only considering all other costs such as rent, insurance, utilities and labour cost.
Net profit margin – This deducts all expenses from total revenue to calculate an overall income and is perhaps the most practical profit margin for most small businesses.
How to increase your profit margins
Regardless of which margin you choose to measure to ascertain the success of your business, there are five key tactics to use when those profit margins are looking a little low.
Reduce operating costs
In a world on the cusp of a global recession, this might be your first port of call. The trick is to reduce operating costs without devaluing your business or offering less to your customers and that’s often easier said than done. It also varies significantly from business to business.
It’s all about knowing what to cut and how and when to make the cut. Start with a thorough audit of your business, including everything from the cost of labour to equipment, insurance, licences and even your office space. There is bound to be one area where you’re spending more than necessary. With office space, for example, could you downsize and give staff rotational remote working days? Don’t be afraid to think outside the box.
The pandemic proved that the future of retail is online so one of the best ways to increase your profit margins without spending a fortune is to invest more in your online offers. This is true even if you’re a local business, as local search has become much more valid, so it always makes sense to have a strong online presence so potential customers can find you.
If you want to take things a step further and expand your online store, it’s never been easier to do so thanks to platforms such as Shopify. You can even sync your physical and online sales using the latest accountancy software and use a payments platform such as GoCardless to consolidate all your online payments and make keeping track of your margins that much easier.
Boost average order value
Your average order value is your total revenue divided by your number of orders, and is a fair indication between monthly financial reports and forecasts of how your business is doing in real terms. This figure can be automatically generated in many accounting apps and changes daily, so you can make minor changes and track their impact almost in real time.
To increase your average order value, you can do several small things:
- Work on building trust in your brand by being transparent with your pricing, investing in your brand story and working on your social media presence.
- Consider adding product recommendations to your individual product and checkout pages or upselling items that go well together.
- Encourage users to spend a minimum amount by offering discounts on orders over a certain value or free shipping.
- Create bundles of items and services to encourage customers to get more value when buying products together and run special offers on products that are refusing to budge.
- Start a customer loyalty programme that rewards repeat and consistent custom.
Of course, the other option is to simply raise your prices but, in this economy, with a cost-of-living crisis to contend with, this is always going to be a last chance scenario.
We can help
GoCardless is a global payments solution that helps you automate payment collection, cutting down on the amount of financial admin your team needs to deal with.
Our platform also syncs perfectly with accountancy solutions such asXero, ensuring you can keep track of your profit margins in real time and make important business decisions accordingly.
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