How to Increase Profit Margins - 9 Strategies
Maintaining consistent sales is only the first step to securing the bottom line. Retailers must also analyze their pricing strategies, inventory procurement, and expenses to ensure sales generate enough income to exceed bills.
By optimizing inventory management, customer loyalty, waste reduction, and brand perception, companies can increase their profit margin.
9 Ways to Increase Profit Margins
Every business wants to expand its bottom line, but many don't know where to start. Owners should first consider the many techniques they can use to increase their profit margins.
1. Avoid Discounts
While discounts are great for getting rid of slow-moving or deadstock, when used too often, they can significantly impact profitability. Retailers that don't rely on markdowns for consistent sales are those that prioritize inventory management.
Deadstock is the result of overordering products that have low customer demand. However, demand can fluctuate significantly from day-to-day, making data collection critical. Businesses should always reference historical and real-time inventory trends to determine their fast and slow-moving items.
By referencing past sales trends, retailers can adjust their reorder quantities accordingly to prevent overstocking products.
2. Enhance the Brand Perception
Customers need to feel like they share a common interest, value, or connection with a business to show them loyalty. Retailers within the cosmetic industry do this very well, as they tailor their aesthetic around how they would like consumers to perceive their brand.
When brands exude luxury, many are able to charge more for their products. And most consumers will meet the price because they perceive the items as valuable. For example, Sephora sells high-end makeup products for relatively high prices, and their customers pay because the products make them feel good about themselves.
However, this tactic extends beyond the cosmetics industry and can be used by any company.
3. Minimize Operational Expenses
Operational expenses, from production to packaging shipments, come directly out of the product's profit margin. Therefore, businesses that are able to minimize these costs retain more of their funds.
Organizations can reduce operational costs by
- Cutting excess staff
- Find cost-efficient packaging supplies (boxes, bubble wrap, tape)
- Implement cost-effective inventory management systems
- Automate repetitive tasks
With an inventory management system, businesses can automate tedious operations, such as bookkeeping. This allows management to either get rid of that position or designate a more complex task to the employee, reducing labor expenses.
By trimming off excess labor, materials, and systems, organizations can streamline processes and minimize operational expenses.
4. Increase the Average Order Value
The average order value (AOV) refers to how much the typical customer spends in one transaction. Businesses that are able to increase the AOV see a boost in profits in a relatively short period.
There are many ways to increase AOV, but the most common methods are upselling and cross-selling. To upsell means to persuade shoppers to purchase the more expensive version of their desired item. This is often done by accentuating its advanced features, functionality, or popularity.
On the other hand, cross-selling involves pitching another product in addition to the customer's order. This technique is most commonly seen in restaurants when they offer a side to accompany the entree.
5. Improve Purchase Practices
Inventory procurement has its own expenses that businesses often overlook. However, managers can minimize purchasing costs by sourcing more cost-efficient goods and negotiating supplier contract terms.
Managers should begin by totaling the cost of each product line, from the wholesale cost to taxes. When the final figure is calculated, management should review the terms of their vendor contract to determine if the set price is reasonable.
Sometimes businesses can increase a wholesale cost by increasing quantity orders. However, this method should only be used for fast-moving products with a low risk of becoming dead stock. Other orders can be consolidated to decrease packaging and transportation costs.
6. Increase Prices
Increasing retail prices is risky - if costs are raised too high, customers may look for products elsewhere. On the other hand, increasing prices by small increments may take too long to yield significant results.
Therefore, companies must carefully analyze their product range to determine which items have the quality and demand level to withstand a reasonable price change.
7. Optimize Supplier Relationships
Aside from negotiating contracts, companies should strengthen their relationship with top-performing vendors by giving them more business.
By engaging in long-term agreements, many suppliers offer reduced prices, exclusive deals, and top priority to companies. This helps mitigate potential supply chain threats by eliminating vendor-business miscommunications.
8. Increase Employee Productivity
The more productive employees are, the more profits businesses can generate. However, many companies do not know how to properly encourage staff to boost production.
First, internal systems should be audited to ensure none are lagging or slowing down workers. Then, each employee should be assessed to determine a reasonable performance expectation for each position. After setting key performance indicators (KPIs), management can offer incentives to top-performers and additional training workshops to bottom-performers.
9. Eliminate Waste
It is normal for operations to generate waste, but it is the company's responsibility to minimize it. There are eight primary causes of waste that can be remembered by the acronym DOWNTIME.
- D is for defects (poor quality control)
- O is for overproduction
- W is for waiting (unexpected downtime)
- N is for not utilizing talent
- T is for transportation (shipping)
- I is for inventory excess
- M is for motion waste (elongated travel time)
- E is for excess processing (returns, repairs, refunds)
By memorizing this acronym, management can identify and eliminate waste throughout their supply chain.