6 Ways to Improve Your Profit Margins

One of the problems that plagues every business is low-profit margins. Dwindling profit margins can be attributed to reasons ranging from fewer sales to higher operational costs. The truth is many inexperienced businesses are simply unable to keep a tight hold of their gross profits – profits that remain after you have sold the products to your customers.

By learning how to price your products, manage your inventory and handle your gross profits, you can improve your profit margins even when the economy is tough.

Control Expenses

Indeed, every dollar saved gains you an extra dollar in profits. One of the smartest ways to control your expenses is to practice zero-based budgeting system. Zero-based budgeting or ZBB is starting your business from a zero-base at the beginning of the year, and the spending each dollar by analyzing its necessity. This is a proven way of reducing costs for many businesses. Here’s a great resource to learn more about Zero Based Budgeting.

Reduce Marketing Costs

While the conventional wisdom tells us to invest more in marketing to boost sales and improve profits, the 21^st century marketing model takes a different approach. Consumer behaviors have evolved dramatically, prompting smart business owners to design their marketing budget judiciously. Dive deep into your marketing dynamics and see which channels yielded your business optimal returns.

Manage Your Inventory

Inventory management is one of the most under-appreciated aspects of businesses. Believe it or not, you can dramatically improve your profit margins simply by optimizing your inventory.

For example, if you’re a furniture retailer, take a stock of your inventory periodically. Maintain the stock of top-selling products ideally because it results in quick turnaround time and improves your cash flow.

Likewise, don’t let the worst-selling items pile up in your inventory – it’s not a good idea to spend your scarce resources on managing stocks that aren’t simply moving fast enough.

Develop a Database

Apart from operational acumen, what really helps some businesses earn more profits than others are their ability to manage customers along sales cycles.

The good news is you too can follow the same strategy to improve your sales and profits.

Always remember the Pareto Principle while dealing with your customers. Also known as the 80/20 Rule of Sales, the Pareto Principle says 80% of your sales come from 20% of your customers.

Develop a database to store customer information and offer your loyal customers discount offers and referral incentives. This will help you gain more customers and improve your sales and profits.

Increase Your Prices

Increasing your prices can improve your profit margins. While that sounds too obvious to mention, an astounding number of small businesses shy away from increasing their prices and lose on profit margins in the process.

Smart businesses, on the other hand, conduct a comprehensive study of the competition and consumer demand, and then price their products intelligently enough to entice the potential customers.

Raising the prices of your product, however, cannot be the sole criterion to increase sales – you need to improve the quality of your products and customer relationship as well.

Up-sell and Cross-sell Your Products

Selling is a great tactic; if you know how to sell a product, you can turn things around overnight. Up-selling and cross-selling techniques have always worked wonders for many businesses.

Up-selling is the art of understanding your customers’ needs and offering them a complimentary item in addition to the main product in order to improve your sales. Not every customer is aware of your offerings and their potential benefits. It’s up to you to understand their needs and suggest a complementary product that may improve their experience.

Cross-selling is selling a new item to an existing customer, since you know they’re more likely to buy your products. If some customer have already purchased many times in the past, they are more likely to succeed at selling them a new product.

Final Thoughts

Managing cash flow of your business requires a great deal of austerity and astuteness. By following the cost management best practices, you can shore up your profit margins in a competitive business landscape. Do you have any secret recipes for improving your profit margins? Please, let us know in the comments below.