Nov 15, 2020

7 Ways to Increase Your Profit Margin

Focusing on your profit is the best way to ensure your business will be around for years to come. Basically, you want to maximize the revenue that remains after deducting the expenses to run your business. 

Let’s take a look at 7 of the best ways to help you increase your profit margins. 

1. Review Cost of Goods Sold

When figuring your profit margin, you’ll need to take into account the cost of goods sold (COGS). These figures are the direct costs for you to deliver a product or service to your customer or client. The bigger the gap—net sales versus COGS—the better. In other words, decreasing your COGS can help you have a larger profit margin.

While COGS will vary depending on the industry and nature of your business, most businesses will pay for some of the following:

Once you have a clear understanding of your COGS, you can begin to assess whether or not you can reduce or eliminate them to increase your profit margin.

2. Negotiate With Suppliers

Reassessing where you purchase products and services will help you cut costs without needing to compromise quality. Maybe you’ve worked with a supplier and want to continue the relationship with them. Is there a way to negotiate a discount or a lower rate with them? Consider asking around to compare prices if negotiations don’t work out.

For businesses with physical locations, it could be time to look at the rent at your office or factory to see whether you’re using the space efficiently. Moving can be a drain on time and resources, so your best move could be to see if your landlord is willing to budge on the rate—or at the very least, not increase it. 

3. Reassess Labor Costs

Employees and contractors are important to running a business smoothly. However, that doesn’t mean you need to spend more than necessary to attract and keep talent.

Take a look at what you’re currently paying for labor. Perhaps you’re paying an employee to do what a part-time contractor can do instead. Or maybe there have been a lot of unauthorized overtime hours. 

Maybe your employee turnover is high, resulting in more costs put toward hiring and training employees. Even if your company only hires contractors, seeing how often you hire and whether those tasks you outsourced can be handled elsewhere is a good use of your time. 

Identifying specific drains on your costs will help you eliminate or minimize them. If you have an accountant, have them break down the costs for you to see where there’s some wiggle room. 

4. Automate as Much as You Can

One of the advantages of running a business today is that a myriad of tools can help you automate tasks. Doing so can help your business become more efficient and reduce costs overall. Software or services can help you automate many tasks, freeing up your resources to grow your business. 

Some systems and tasks you can automate include:

5. Drop a Product or Service

Sometimes it’s not worth continuing to sell a product or service, especially if it’s a huge drain on resources. Comb through your financials to see if there are any offerings that aren’t profitable or you don’t invest time and energy into anymore, and consider eliminating them. Taking this simple action can ensure that you can redirect those resources elsewhere to increase your profit margin.

6. Increase Prices

It’s obvious, but raising prices is one of the best ways to increase profit margins without having to decrease COGS (though it can certainly help). However, don’t go raising prices by huge amounts without considering your customers or clients. Take care to raise the prices in increments or in a way that gives people plenty of time to plan for the increase.

You may be surprised that you’ll get more sales just before your prices are set to go up—wouldn’t you want to lock in a lower price? 

7. Improve Your Customer Service

While not a direct action that’ll increase your profit margins right away, improving your customer service can result in more sales over time. Imagine if your business was known as an organization that offers excellent service—who wouldn’t want to come back? 

Take a look at all the ways your customers or clients interact with you, from email to telephone calls and even face-to-face meetings. Then look at how efficiently your company responds to them, including responding to reviews and feedback online. 

Afterward, find ways to improve customer satisfaction overall, whether that’s training your employees to sell better or modifying your automated emails to request feedback on a regular basis. 

Improving the way you do business will help you increase your profit margin. It’s not about cutting corners. Rather, it’s about managing your resources effectively, including raising prices when necessary to ensure the same quality your customers and clients expect from you.

About the author

Sarah Li Cain
Sarah Li Cain
Sarah Li Cain is a finance writer and a candidate for the Accredited Financial Counselor designation whose work has appeared in places like Bankrate, Business Insider, Financial Planning Association, Investopedia, Kiplinger, and Redbook. She’s the host of Beyond The Dollar, where her and her guests have deep and honest conversations about money affects their well-being, and Podcasting Q&A, a branded podcast from Buzzsprout.

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