Margin or turnover: Three ways to increase your profitability
- Red Increased turnover may call for an increase in infrastructure and overheads
- Amber A higher price usually demands a better quality product than your competitors
- Green Increasing price without hitting costs or sales goes straight to your bottom line
Boosting the profits of your business by increasing turnover or margin may sound simple, but how do you go about putting a strategy in place?
I want to increase my business profits
You are probably already aware of the three things that can increase your profitability: sell more products [increase turnover], sell the same quantity of products at a higher price [increase margin] or reduce costs [increase margin]; whilst it is simplistic to suggest that the answer to your question is just a single one of these components, having a focus will help.
The difference between fixed and variable business costs
I would usually advocate that the best place to start is where you are most in control, which is normally your cost base, although even then you need to separate and look at both fixed and variable costs. Starting with fixed costs [overheads], do you have the right administrative people in place? Too many or over-qualified staff perhaps? If so, taking a long-term view, would it be possible or desirable to reduce your staff base? Look at premises? Are they suitable and cost effective? Again, take a long-term view here as you don’t want to have to relocate more frequently than necessary. Moving on to other costs, have you shopped around to make sure that you are paying sensible prices for energy, Insurance and other services? A cost saving in any of these areas will translate straight to your bottom line.
If we then look at variable costs, again look at employees – right people and number of people? What about your suppliers? Are you getting a good price and good terms from them? Can you use offers from other potential suppliers to negotiate with your current suppliers. Bear in mind relationships of course.
Will reducing my business costs increase my margin?
Yes, reducing variable costs will improve your Gross Profit Margin and whilst Net Profit Margin isn’t a commonly-used measure, a reduction in both fixed and variable costs will improve this. In either case, you are then making more profit from the same level of turnover, so you haven’t had to increase your sales at all. Keep quality in mind though – if your cost reduction leads to complaints and need for remedial work, then this may have been a false economy.
Can you increase price without hitting your sales?
Look at your sales: can you increase price to increase income without losing too many sales? Here you really need to look at your offering and your marketplace. Firstly, how does your price point compare to that of your competitors? Is there scope to increase whilst remaining competitive on a like-for-like basis and purely from a pricing perspective? Also, does your product or service have a USP [unique selling point] that allows you to charge a premium on the price against competitors? If not, can you create a USP that allows you to do this e.g. by improving the quality – or perception of quality – of your product or perhaps the way that it is delivered? If price can be increased without impacting cost, then Gross Profit Margin has been improved.
Bear in mind that you might have to increase your costs to increase quality and price, but if there is still a net increase in your GPM, then you have still gained from this. On the other hand, if this impacts too much on the number of sales, then it has been counter-productive.
What about increasing your sales numbers?
Yes, volumes of sales. Can you increase your sales, perhaps by going after customers of competitors more vigorously? This might just be making them more aware of your offering (advertising or marketing) or perhaps you need to address pricing with them such as special offers, or even reducing your price. I would exercise some caution here, if you get into a war with competitors based on price alone, this can often damage you and your competitors, with customers now just buying at a lower price. Also, a general reduction in price just means having to sell more units to maintain current turnover levels.
Have a clear strategy
Yes, I do appreciate that this is a number of options and each one of these options has the potential to work against you.
What is really important though is to make sure that you do understand what your strategy is and to make sure that any pricing decisions you make are properly aligned to this strategy.
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