14 ways to increase profit margin
Running a successful business is a balancing act that can grind to a halt when spending exceeds income. To remain attractive to your market and investors, stay in the black, increase profit/revenue, and keep your eye on profit margins.
Increasing sales is always a business positive, but increasing profit margins requires a more robust approach. In addition to boosting revenue, you need to understand the profit margin formula and know how to utilize it.
Master the art of generating profitAccess the Free Content Series
What are profit margins?
Your profit margin is the total amount of money you bank after a completed transaction. The profit margin formula is the difference between your revenue and your costs. To calculate this, divide your net income (total revenue minus expenses) by your net sales (gross sales minus returns, discounts and allowances) and multiply the result by a hundred.
A company’s profit margin shows how it manages expenses, and investors use this calculation for due diligence when sizing up a potential investment. Therefore, understanding how to increase profit margins is vital to your bottom line and ability to attract investment. Improving profit margins can also help your business become more resilient during inflation or an economic recession.
What is a good profit margin?
The average profit margin is around 10%, but this varies from industry to industry. A business whose margin exceeds the average is outperforming the overall market, while a consistently subpar margin may be a sign of a failing business.
To gauge a firm’s overall performance, investors compare the operating profit margin to the entire industry or a benchmark index like the S&P 500. High-profit margin industries include luxury goods, software companies, pharmaceuticals, finance, banking, real estate, transportation and professional services like tax preparation and law. Many of these industries are also excellent small business opportunities, even in a recession.
Some businesses are notorious for their low-profit margins, including restaurants, grocery stores, hotels, car dealers, furniture stores, retirement homes, medical equipment wholesalers and amusement parks. If you start a business in one of these categories, you’ll need to find sustainable ways to increase profit margins.
What causes profit margins to decline?
Profit margins are based on expenses vs. revenue. When profits decline, your margins will go down, usually due to lagging sales, the economy, a social shift in your customer base, or a failing business model. In short, you’ll need to increase sales to increase margins.
All industries are at the mercy of overall economic conditions, and a rise in expenses can affect your profit margins. Inflation causes rising production costs due to shortages in the raw materials needed to make your product. Rising wages and issues like the Great Resignation can increase labor costs and leave you wondering how to increase profit margins.
Your industry may also be upended by a disruptive new technology that changes the market overnight. Something as straightforward (and fixable) as careless accounting procedures can also throw off your revenue vs. profit ratio, causing a dip in profit margins.
How to increase profit margins
Mastering your profit margins will empower you to face business challenges with confidence.
1. Strive for incremental growth
It’s easy to get ahead of yourself when working to increase profit margins and overall profits. Instead of falling into that trap, learn to strive for incremental growth. Having an end goal is important, but it’s even more crucial to set small goals you can manage and track over time. With this approach, you can make consistent progress and monitor your business’s performance.
Also, check-in with yourself – do you have the time frame and resources to achieve your goals consistently? It’s great if you want to make $50 million, but that takes time. Instead, set incremental goals to increase your profit from, say, $5,000 to $10,000.
2. Focus on strategic innovation
It’s rare to find a company that offers its clients a brand-new product. Today, successful businesses tend to strategically innovate by expanding on existing ideas in a way that appeals to their customers. To truly understand how to increase profit margins, focus on identifying your customers: Who are they, and what need do they have for your product?
Netflix is a prime example of a strategic innovator. Before streaming exploded in popularity, people were happy to rent physical media at Blockbuster. Netflix capitalized and found a way to make movies more accessible to their target audience – they strategically innovated. Fostering an innovation culture will put you leagues ahead of your competitors and help increase profit margins.
3. Create an incredible team
Building a team that works is a huge part of the drive to increase profits. Who do you have on the team that supports you 100% and is willing to rave about your business and bring in new customers? Creating an internal culture of raving fans is critical to increasing your company’s profit margins. It’s always easier to succeed with a team of people who are excited to work for your brand and passionate about your purpose.
4. Identify what’s not working
If you’re unhappy with your profit growth or margin, take an objective look at your business and identify the gaps. Your company may be successful, but there’s always something you can do to increase profits. For example, examine expense reports, personnel reviews and current sales to see what’s lacking and address any noticeable gaps.
Have you stopped identifying ways to get new customers? Assessing your business’s current state and possible shortcomings will help you create a better plan to move forward and increase profit.
5. Fine-tune your production processes
The laws of physics apply in business, and velocity matters. A quick order-to-delivery product turnaround time will lower your overhead and generate revenue faster. In other words, the fewer steps you have, the more you can increase profit margins.
Examine your production process, from first customer contact to delivery of your product, and figure out how to speed up each step. Automation is already transforming how we work by taking on repetitive tasks and customer service roles, but can you leverage automation to create new efficiencies? Streamlining can trim costs and increase your company’s profit margins.
6. Plug financial leaks
The beauty of studying how to increase profit margins is that they are, by definition, ratios. You don’t necessarily need an increase in profits to increase margins – reducing expenses and examining how your business spends money is also a viable approach.
Where are you losing money through spoilage, scrap or waste? Is your forecasting off, causing you to overspend on raw materials? Are there quality control issues with your product? Is your product selling so slowly that it becomes obsolete? Are your distribution channels efficient? Consider all options for trimming loss so you can cut costs and increase profit margins.
7. Prioritize higher-end products
When your profit margins dip, it’s easy to take an “anything goes” approach to marketing and production. However, this may backfire in the long run as low-margin products produce less bang for your buck. Focus on products that deliver the highest profit to increase your profit and overall margin numbers. Quality products inspire loyalty and boost revenues.
The same applies if you provide a service instead of a product. Cut low-margin clients and put your resources toward better-producing areas of your business. It can be hard to end relationships with long-term clients, but there are professional ways to fire clients. Remember, your business is a valuable commodity, not a charity.
8. Capitalize on other people’s resources
Marketing guru Jay Abraham believes that most business owners think too small when trying to increase profit margins. Most companies are satisfied with a 10x growth strategy, but Jay insists they should aim for a 100x internal growth model. The question is, how do you accomplish that?
Using leverage to benefit from other people’s resources is one way to achieve that kind of growth. Jay suggests utilizing other people’s money, time, experiences, ideas and current customers to increase profits. In other words, capitalize on another company’s tangible and intangible resources to achieve explosive yet sustainable growth. To implement this formula, acquire smaller companies, work with influencers, and create cross-promotional campaigns.
9. Get unstuck
Are you stuck in your business and feel it’s impossible to increase profits? Or, as Jay suggests, are you stuck thinking a 10x growth strategy is all you can achieve? Jay has a nine-step plan for getting unstuck, which includes:
Gaining your market’s trust
Developing a maven persona
Establishing a vision for your marketplace
Telling your creation myth
Creating a velvet rope community
Another way to get unstuck is to reconnect with your passion. When you have a powerful company vision, others can’t help but follow. As Keith Cunningham says, “Many people go into business and end up with a hobby. The difference between a business and a hobby is that a business makes you money.” If you feel stuck, you’re either making money without passion, or passion is taking precedence over business sense. Combine passion with profitability and achieve profit margins you never dreamed possible.
10. Use the Power Parthenon method
Most businesses have one primary marketing method that generates most of their revenue. Jay refers to this as the “diving board method” and often includes direct sales, referrals, digital marketing or brand building. What happens when that method becomes less effective? Profit margins decline and you lose market share. Instead, Jay suggests using a Power Parthenon method with different pillars, each of which is a revenue-generating activity.
Joint ventures are a smart method to add to your strategy. Look into creating partnerships, endorsements and other unconventional techniques so you won’t depend on a single activity for your profits. All activities can then work together to produce larger profit margins.
11. Create a loyalty program
Repeat customers increase profit margins faster than new customers. Why? They tend to spend more and tell others about your products and services. They also cost less as you don’t have to spend marketing money to convert them from prospects into customers.
Creating a loyalty program for regular customers can increase profit margins and transform repeat customers into raving fans of your company. Entice them with exclusive sales, cash back, rewards, free products, or extra discounts.
12. Renegotiate with your vendors
Contract negotiation is common during high inflation, so consider negotiating with your vendors before your contract is up for renewal. See if you can lower your costs through the power of negotiation before you increase prices. And if you’re looking for a new vendor, remember to talk with multiple suppliers and have clear business goals in mind.
If you’re under contract, your vendors have no obligation to negotiate. However, if you approach them as a partner, they may see a benefit from lowering prices. Long-term vendor relationships are mutually beneficial, so your supplier has a vested interest in seeing your business thrive.
13. Increase pricing
You can quickly increase profits if you consistently make high-quality products or perform professional services. Pricing must increase with inflation and with the growth and experience of your company.
If you have a strong and happy core customer base, a modest price increase will not cause you to lose business. On the contrary, alongside the increase in profit margins, a price increase can raise your value in the eyes of your customers.
14. Outsource when possible
Is payroll eating up your resources and decreasing profit margins? Many small businesses struggle to maintain consistent staff levels. Too few, and it’s hard to take care of customers. Too many, and you have a high payroll with idle employees. Outsourcing parts of your business is a viable solution – using freelancers or contractors when demand is high creates potentially significant savings on payroll costs.
Not everyone masters how to increase profit margins. Many businesses fail, but yours doesn’t have to. Knowing how and when to adapt is the key to professional success. Are there ways to progress that you still need to consider? Is there a key leadership position you need to fill? When you know what your business truly needs, you can create a sustainable, profitable company and reap the benefits for years.
Unlock the ultimate business advantage
Increase profit margins – and crush the competition – when you attend Business Mastery.