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Upon launching your startup, and for much of its existence stage, one of your main concerns will be how to keep cash flow steady. Down the line though, as the business and its revenues grow, your focus will shift towards profitability.

The fact of the matter is that running a business that isn’t earning profit doesn’t make much sense. Simply put, doing business is about being profitable. And what is profit? It’s the difference between sales and expenses.

Is that it? No, I’m afraid.

Just making a profit isn’t good enough. You need to make good profits. In business speak, you need healthy profit margins.

So, what can your small business do to increase its profit margins while operating at current capacity?

These are some of the strategies you can employ in this regard.

 

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1. Leverage on your expertise

Customers will readily purchase products/services from persons whose expertise they trust. Whatever your industry, you must prove your proficiency. There are many ways of doing this.

Running a blog is a good example of how to improve your credibility.

Through your website you can share informative contents and engage your target market in pertinent discussions. Combining this with social media will greatly maximize your reach.

Nevertheless, this trust can neither be earned overnight nor can it be bought. It will take time and continuous effort to create a solid reputation and be viewed as an authority.

 

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2. Charge different prices for the same thing to increase margins

Unless you are in a business that deals with products whose prices are standardized, you don’t have to charge each customer the same price for your product.

There are of course some customers who have less price sensitivity compared to others; this is the basis of price discrimination. Charging such customers a higher price will help to improve your overall profitability.

3. Increasing your prices

You have to adjust your prices upward after suppliers raise theirs, ensuring that your new price will give you a similar or possibly better profit margin. Of course your new price has to keep up with what the competition is charging.

Then again, sometimes you don’t need a reason to hike your prices. Entrepreneurship is about calculated risk-taking; testing the waters once in a while may reveal helpful hints for boosting your bottom line.

For businesses where prices are unique, say in the creative arts industry, customers are not too concerned about the prices as they are about the value of the artwork. You, as the producer of the artwork, may be reluctant to start charging more but you have to consider your ever-increasing overheads. A decision to raise your prices may result in the loss of some customers but it’s quite likely that your margins will become healthier as a result of selling to fewer but better paying clients.

Again, you may have to lose certain customers, especially the price-sensitive type, to become more efficient and profitable.

 

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4. Compete on value, not price

Given the plethora of similar businesses in virtually every industry, the onus is on businesses to develop a competitive edge so as to distinguish themselves in customers’ eyes; the customer is truly king!

By adding value to your product and/or service delivery you can manage to make a better profit margin, substantially exceeding that which you could have made by offering an industry-standard sort of service.

This concept is referred to as servitization. It presents a win-win proposition for both providers and their customers and is a crucial step towards creating long-term relationships and earning repeat business.

A barber, for example, can comfortably charge higher rates for the same basic service by ensuring that his clients are always extremely comfortable. Installing several flat-screen TVs with cable channels, investing in cozy leather seats, and having the staff dress in clean uniforms, etc, will likely make a better value proposition for clients and they’ll gladly pay more.

5. Stop offering discounts

While offering discounts is generally considered to be an advantageous practice there are actually several strong reasons against doing it. Learn more about not discounting and the options you have here.

Offering a discounted price implies that you’ll have to sell more units of the same product to make the same profit.

You are already struggling to sell a certain quantity of product, why make your work even harder? Or are you such a workaholic that enjoying a day off doesn’t make sense?

 

6. Are your bills accurate?

Always keep an eye on the bills you are paying. Some crafty suppliers may decide to charge you for products or services you haven’t received, or charge wrong (read higher) prices. Simply paying up without checking such details is self-defeatist; those small errors do add up.

 

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7. Curb theft

Any form of business theft implies a loss of profits.

Retail theft, also known as shrink, is a global menace. In 2012 the cost of shrink globally was a massive $112 billion.

Don’t condone the vice. Install the necessary systems to prevent pilferage be it through shoplifting, ‘erroneous’ bookkeeping, employee theft, or any other way that this is being done.

8. Introduce an effective inventory management system

With the help of an inventory management system you’ll be able to reduce incidences of stock theft and stock obsolescence, know when batches of your top-performing products need to be replenished, and calculate the costs of making your products.

When it becomes easy to monitor such checks and balances you’ll have the ability to ensure that just the right amount of working capital is tied in inventory.

 

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9. Concentrate on marketing to your existing customer base

While seeking out new clients for your products is imperative, those that already exist are the ones you need to focus your sales efforts on. The idea here is to make them repeat customers.

Building from their initial purchases, reach out to them and propose “limited time” offers for “esteemed clients”. This way it should be possible to earn regular business from your customer base, effectively increasing your sales volumes and overall profitability.

Don’t forget that satisfied customers won’t hesitate to refer new customers your way.

10. Focus on industry-oriented marketing

Focusing on potential customers within one or two specific industry segments is guaranteed to be more effective than trying to sell across the board.

Not only is niche marketing time and cost-effective, you will soon enough earn a reputation for industry expertise. The result will be more referrals, lower cost of sales and higher service rates, and subsequently increased revenues.

11. Outsource whatever isn’t part of your core business to minimize your overheads

Outsourcing business support services to reputable providers will allow you to become more efficient in your core business activities.

In as far as the decision to start outsourcing is concerned, a number of eye-openers come to mind including:

  • The prospect of making time and cost savings
  • The opportunity to work with people with more expertise than you do
  • Giving your current workforce the opportunity to perform optimally
  • The opportunity to gain new insights and fresh perspectives about accomplishing tasks

Your freelance writing firm, for instance, should ideally concern itself with hiring writers – especially remote ones if this is feasible. You can outsource everything else including telemarketing, accounting, bookkeeping, payroll administration, etc. This way you won’t have to foot additional expenses like employees’ health insurance, taxes and benefits.

 

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12. Appreciate employees in order to get the most from them

When building a team you must be keen to hire guys who are not only highly qualified but also those who seem to ooze genuine passion for the industry. The more enthusiastic your team is about the job, the more productivity you can expect.

Play the part too. Make sure that they are working in the best possible environment. Learn to trust their abilities, encourage innovation and new ideas, and treat them as equals. Soon enough you’ll start earning dividends in the form of increased profitability.

 

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13. Invest in the right equipment

With appropriate equipment you are more or less guaranteed improved efficiency, less incidences of error, reduced costs of production, and improved safety for your employees. The decision to replace outdated equipment with modern versions will most likely be quickly vindicated by vastly improved productivity, efficient energy consumption, and reduced wastage.

 

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14. Take calculated risks

In an industry where competition is rife you may have to adopt a novel way of doing things in order to stand out from the pack. Such a decision has to be well thought out though; you must consider what your options will be in the worst case scenario.

Don’t let fear hold you back. Entrepreneurship is, after all, about calculated risk-taking.

 

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15. Take advantage of your flexibility

A small business is generally flexible. Unlike bigger entities a small enterprise can be able to rapidly re-configure its business model and thus serve its clients better.

Don’t be too rigid. It is possible that you will thrive best doing something entirely different from what you set out to do at inception.

16. Infuse creativity into the creation of your products/services

Creative thinking and innovation will allow you to come up with products/services that are both unique and capable of satisfying customers’ needs.

It will also inspire you to identify new opportunities that you can exploit and also develop new methods for problem solving.

If partnerships and collaborations are what is required for this to happen then why not? Provided that your business’ mission and values won’t be eroded, and the proposed direction makes business sense, there is really nothing to hold you back.

17. Cut out laggard products/services

With reference to the BCG Growth Share Matrix, you may have cash cows and stars that are responsible for virtually all your revenue and profits but it may be the case that you have dogs that are steadily pulling you down.

You need to be objective in such a situation.

If you’ve tried long and hard to push these products to the market but still don’t have much to show for your efforts, the best solution may be to discontinue production altogether.

 

18. Learn from the competition

Despite being confident that you are doing far much better than your competitors, be humble enough to realize that you can learn one or more things that you can implement and improve your operations. Dave Kahle has some tips for how to go about doing this here.

Then again, you just might discover some things you are definitely not meant to; such should help to nurse your bruised ego!

 

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Comments
  1. Hi, Samuel.

    That was a nice post to read. It was packed with so much useful information which must not be overlooked.

    I thought charging different prices for the same thing sounds good. I’ve often fallen into the trap of undercharging just to get clients, but you showed that I should never go down, but, in fact, to go up when possible. That was one of many fine tips that I learned from this post.

    Thanks.

    Nathan.

    Like

    • Hi Nathan, Thanks for reading the post and taking time to comment. That particular point is always nice to remember; I have undercharged clients myself once too often. Here’s to hoping that we’ll forthwith consider our products/services valuable enough to justify the sorts of prices we deserve…Cheers!

      Like

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