Revenue vs. profit

What are profit margins?

Running a successful business is a balancing act that can grind to a halt if your spending exceeds your income. To stay afloat and remain attractive to your market (and investors), you must stay in the black. How can you tell if you’re experiencing smooth sailing versus a deceptive eye of the storm? You must understand the profit margin formula – the difference between your revenue (the amount of money your company brings in) and your costs – and take control of it to succeed. Since your profit margin is how much money you actually get to walk away with after a transaction is complete, understanding how to increase your profit margin in business is fundamental to growth. By learning to master your margins, you will empower yourself to face challenges with confidence. 

So, how can you generate a larger profit margin?

Understanding how to increase your profit margin in business

Understanding how to increase the profit margin of your business is vital to your bottom line and ability to attract investment. Since a company’s profit margin indicates its ability to manage its expenses, investors use them as a basis of comparison when sizing up a potential investment. To get a sense of a firm’s overall performance in the market, investors compare its operating profit margin (its dollar-to-dollar conversion of revenue into profit) to that of the entire industry, or to a benchmark index like the S&P 500. While profit margins vary industry to industry, the average profit margin is around 10%. A business whose margin exceeds the average is outperforming the overall market, while a margin that’s consistently subpar may signal a failing business. The profit margin formula for operation is based on dividing your net income (i.e. total revenue minus expenses) by your net sales (i.e. gross sales minus returns, discounts and allowances) and multiplying the result by 100. Whether or not you’re over 10%, there is always room for improvement to increase your profit margin and your business’ overall resiliency.

 

What causes profit margins to decline?

To increase your profit margin, understand that profit margins are subject to a variety of influences that can cause them to decline. All industries are at the mercy of overall economic conditions, which impact everything from consumer behavior to interest rates to the cost of raw materials, labor and production. Your industry may find itself upended by a disruptive new technology that changes the market overnight. Something as straightforward (and fixable) as careless accounting procedures can also imbalance your revenue vs. profit ratio, causing your profit margins to dip.

How to increase your profit margin step-by-step

1. Strive for incremental growth

It’s easy to get ahead of yourself, especially when you’re working to increase your business’ profit margin. You start thinking about your ultimate goal, and forget about all the little steps it takes along the way to get there. Instead of falling into that trap, learn to strive for incremental growth. It’s important to have an end goal, but it’s even more crucial to set small goals that you and your business can manage and track over time. This allows you to make consistent progress and monitor how your business is performing. Check in with yourself – do you have the time frame and resources needed to consistently achieve your goals? It’s great if you want to make $50 million, but that doesn’t happen overnight. Set goals along the way to increase your profit margin from $5,000 to $10,000 and so on until you’re in a position to set your sights on your ultimate objective.

woman calculating profit margins

2. Focus on strategic innovation

calculating profit margins

There aren’t many companies that can say they honestly offer their customers something brand new. At this point, successful businesses expand on existing ideas, but they do it in a way that’s useful and appealing to their customers – they strategically innovate. To truly understand how to increase profit margin numbers for your business, identify who your customer really is. Who is this person and what need do they have for your product?

An example of a strategic innovator is Netflix. Before the streaming service came along, people were happy to rent tapes at Blockbuster. Netflix saw how they could capitalize on this need for home entertainment, and found a way to make movies even more accessible for their target audience. They strategically innovated. If you’re able to create an innovation culture, you’ll be leagues ahead of your competitors and can expect your profit margins to rise accordingly.

3. Create an incredible team

Developing a sizable profit margin is partly about the service or product you’re offering, but it’s also about your success in building a team that works. Who do you have on your side that supports you 100%? Who works for your business that not only knows the company inside and out, but is willing to rave about your business and bring in new customers? To increase profit margins for your business, creating an internal culture of raving fans is just as critical as locating your target audience. When you assemble a team of people who are excited to work for your brand and spread your message, it becomes a hundred times easier to be successful.

company increasing profit margins

4. Identify what’s not working

how to increase profit margins

If you are not happy with your profit margin, you need to take an objective look at your business and identify the gaps. Even if your company is successful, there’s something you can do to make it more profitable. Look at your expense reports, personnel reviews and current sales. What area is lacking? If there’s a noticeable gap, address it. Why did your business spend $10,000 on office supplies last year when nothing major, like your copy machines or computer chairs, has been updated? Have you stopped identifying ways to get new customers? Assessing the current state, and possible shortcomings, of your business will help you create a better plan to move forward and generate a larger profit margin.

5. Fine-tune your production processes

The laws of physics apply in business, and velocity matters. The faster you can turn a product around from order to delivery, the faster you’re able to generate revenue and increase your profit margin. Take a close look at your production processes, from your first contact with a customer to the moment your product is delivered safely into their hands. How can you speed up each step of the process? By streamlining, you’re able to trim costs and increase profit margins for your company.

fine tune

6. Waste not, want not

waste

The beauty of studying how to increase profit margin numbers for a business is that profit margins are by definition ratios. You don’t necessarily need to increase your profits to improve your margins – you’ll likely find success in reducing your expenses as well. Examine all the ways your business spends money. Where are you losing money through spoilage, scrap or waste? Is your forecasting off, causing you to purchase too much raw material? Are there quality control issues with your product? Is your product selling so slowly that it becomes obsolete? Are your distribution channels efficient? By carefully considering all your options for trimming loss, you can cut your costs and increase your 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. This approach may backfire in the long run, since a low-margin product produces less bang for your buck. To increase your profit margin numbers, focus on products that sell best and deliver the highest profit. Quality products inspire loyalty as well as boost revenues.

high end

Jay Abraham’s strategies on increasing internal profits

Marketing guru Jay Abraham believes that most business owners think too small when it comes to increasing profit margin. While most companies believe a 10x growth strategy equals success, Jay thinks that they are capable of much more – up to a 100x internal growth model. How do you accomplish that? Here are some of his strategies.

1. Capitalize on other people’s resources

By capitalizing on other company’s tangible and intangible resources, you can achieve explosive yet sustainable growth. Jay suggests finding ways to utilize other people’s money, time, experiences, ideas and current customers to fuel your profits. Capitalize on this profit margin formula by acquiring smaller companies, working with influencers and creating cross-promotional campaigns with those you can share resources with.

resources

2. Get unstuck

get unstuck

Are you stuck in your business and feel you can’t increase your profit margin no matter what you do? 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 that includes gaining your market’s trust, developing a maven persona, developing a vision for your marketplace, telling your creation myth and creating a velvet rope community. Not only will this plan get you unstuck, it will also fuel a profit margin you never dreamed possible.

3. Use the Power Parthenon method

Most businesses have one primary method that is generating 90 to 100% of their revenue or profit margin. Jay refers to this as the “diving board method.” He suggests using a Power Parthenon method with different pillars instead, each of which is a revenue-generating activity. This strategy means you won’t be dependent on a single activity for your profits and that all activities will work together to improve each other and create a much larger profit margin.

There’s an art to creating revenue vs. profit, and it’s one that not everyone can master. Many businesses fail, but yours doesn’t have to. The key to professional success is in realizing how and when your company needs to adapt. Are there ways you can move forward that you haven’t considered? Is there a key leadership position you need to fill? By knowing what your business truly needs, you’ll create a sustainable, profitable company that you can reap the benefits of for years to come.

parthenon

There’s an art to creating revenue vs. profit, and it’s one that not everyone can master. Many businesses fail, but yours doesn’t have to. The key to professional success is in realizing how and when your company needs to adapt. Are there ways you can move forward that you haven’t considered? Is there a key leadership position you need to fill? By knowing what your business truly needs, you’ll create a sustainable, profitable company that you can reap the benefits of for years to come.

Master the art of generating profit

Learn the essential pieces to create the ultimate business advantage that will boost your company’s profit margins with Tony Robbins’ complimentary Seven Forces content series.