4 Ways To Increase Profits - Without Having To Increase Sales
In last week’s blog post, "7 Actions To Take When Business Is Slow", I recommended 7 actions you could take to boost business if it’s slowed down. If business has slowed down, one of your aims must be to boost marketing activities and therefore sales; but it’s still possible to increase profits, even if your turnover hasn’t increased. In fact, it's essential that you do.
Readers of this blog will know that I'm a great proponent of monthly reviews. When I carry out my own monthly review, one of the questions I like to ask myself is what one action can I take this month that will increase my profits, even if it’s by just 1%. More than 1% is obviously better! And so I’d love for you to schedule a regular monthly date with yourself to review your financials, and use this time to ask yourself this question - what one action can I take this month to increase my profits, even if it’s by just 1%?
In this post, I’m going to take you through 4 ways you can increase your profits. If you increase your profit margins by just 1% each month, that's an increase of more than 12% over the course of 12 months.
1. Carry Out An Audit Of Your Expenditure
Review all your out-goings. This will almost certainly highlight costs that seem particularly high and or on reflection aren’t essential.
- Look at your supplier costs. Can these be reduced? Are they delivering value for money?
- Are you paying for subscriptions that you’re not really using? If so, cancel them, even if only for a month to see what difference this makes.
- If you employ staff, consider if you can deliver the same results by outsourcing rather than directly employing staff?
- Salaries are usually the highest expense in a business. Are your staff working to their full capacity?
- Review your office and travel costs and consider whether more work could be done online, at home or in a shared office.
- Assess the cost of any materials needed to supply your goods or services. Could you reduce this without making your products less desirable, such as by switching to slightly lower specification materials? You could also consider putting work out to tender to root out more cost-effective suppliers.
- Reduce your stock. Consider whether you can cut back on the level of stock you hold. Can you get hold of or manufacture items quickly enough to satisfy customer orders without having goods sitting in storage for long periods? Aim to keep just enough stock to service your customers' needs.
- Watch supplier bills. Check these personally. After a while you’ll get a “feel” for things which aren’t right. Don’t be surprised to find that you’ve been overcharged for goods or services you haven’t received or that you’ve been billed at the wrong prices.
2. Review Your Prices
Recently I surveyed members of my Plan For Profit group to find out their #1 business challenge. A number of them cited pricing strategy.
What’s your pricing strategy? Are you pricing at a level that allows you to resource your business properly, to fund your marketing activities, to build a contingency fund and to pay yourself at the level you want?
How do your prices compare to those of your competitors? Are you charging less than your competitors because you’re new in business? This is a common error. If so, start the process of raising your prices to where they need to be.
Perhaps you’re worried that you’ll lose customers if you increase your prices? Let’s look at the maths. If your gross profit margin is 20%, a 5% increase in price means you can lose 20% of your customers and still bring in exactly the same income.
Take Amazon for example. In 2014 the company raised the price of its annual Prime subscription from $79 to $99. Despite the $20 increase in price, the company lost less than 5 percent of customers, resulting in a substantial $400 million in extra income.
Here are 6 reasons why you should raise your prices.
i. Because you want higher profits. Now this might sound flippant, but on a serious note, you may well need to put up your prices to achieve a decent profit margin.
ii. Economic reasons – increases in inflation for example which have raised your overheads and reduced your profits.
iii. You’re in demand and booked up. If that’s the case, do a happy dance and raise your prices.
iv. If you’ve recently significantly upgraded your skills and/ or received a new certification in an area that better helps you to meet your clients’ needs.
v. If you’ve upgraded the way in which you present yourself – your office, website, promotional materials – in order to be more attractive to higher end clients.
vi. The price was too low in the first place.
If your products and services are very price sensitive, this may not be an option for you. In which case you’ll want to consider my third tip.
3. Review Your Products & Services
Businesses that offer a range of products and services can use a simple technique to increase profits. This involves reviewing both sales and profit margins periodically, and dividing products and/ or services into four categories:
1. They generate a high percentage of sales and high profit margins
=> Nurture these stars
2. They generate a high percentage of sales but low profit margins
=> Consider a price increase and examine how you can cut costs to increase your profit margins
3. They generate a low percentage of sales but high profit margins
=> Consider a sales push
4. They generate a low percentage of sales and low profit margins
=> Eliminate these where possible
4. Fire Some Of Your Customers
Getting rid of the least profitable 20% of your customers may sound scary and radical. But it frees up your capacity and resources to concentrate on those ‘star’ customers who are responsible for a high percentage of your sales and high profit margins. Why do I say this? Well The 80:20 Principle, also known as Pareto’s rule, says that 20% of inputs cause 80% of outputs. This means that in business, 20% of our customers deliver 80% of our profit. So concentrate on the customers who are your ‘stars’ and eliminate those customers who contribute little to your bottom line. How can you do this?
- List your top 10-20% of clients by profitability. What do they have in common? Where do they spend their time? How can you find more like them? How can you get them to increase their spend with you? How can you improve your offering so that they become raving fans and recommend you more? How can you ensure their loyalty by delivering a better service than your competitors? Bear in mind that your best customers are likely to be key players in their niche and will know other people just like them.
- List your 10-20% least profitable clients. Why are they less profitable? What are you going to do with these businesses? Increase prices to offset the costs of dealing with the installation of tricky products or having to deal with difficult customers? Stop working with them? Put in a cheaper resource to manage the relationship? Check out my post, "Dump Your Dud Clients" for further ideas.
Bonus Tip: Protect Your Marketing Spend
Cost-cutting is essential when business is slow, but continuing to spend on marketing is vital to attract and retain customers. In my experience, most businesses don’t invest sufficiently in their marketing. Marketing is an investment, not just a cost. Focus your marketing efforts on your most profitable customers and calculate how much revenue you need to make for these costs to be worthwhile. It’s your investment in marketing that will grow your business. So use increased profits and savings to increase your marketing budget.
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Questions: Do you have any other tips to increase profits? Which one tip are you going to action? I’d love your feedback.