Saturday, September 11, 2010

Raising the darn profit margin

The profit margin is the percentage of sales we get to keep as profit. A high profit margin makes your company more resistant to adverse business conditions, requires a lower sales volume to breakeven, and leaves you with more profits to expand your business or payout dividends. 

Needless to say, we all generally want our businesses to earn good margins. In this article, I will look at a few ways we can improve our companies’ profit margins.

Stop selling lower margin products
Business owners can consider discontinuing their non-strategic lower profit margin products, as these products could be bringing down their companies’ overall margins. I know that some companies are able to generate good returns on their equities with a business model involving a low margin and a high volume. But for the sake of this article, we will only focus on the profit margin, and not take into account the return on equity.

Start selling higher margin products
Business owners can try and sell more of their higher margin products. They should make sure, however, that the costs incurred for things like advertising, promotions, and etc, which are done to attract customers to buy their higher margin products are worthwhile.

Business owners should invest in a good accounting system to effectively and efficiently identify higher margin and lower margin products. A good accounting system can help business owners know the costs associated with each of their products, which in turn allow them to price their products better and discontinue non-strategic lower margin or loss-making products.

Busting your suppliers’ balls
Are you buying products or materials in significantly larger volumes than you did when you last negotiated the price or prices with a particular supplier? If so, maybe it’s time to pay the supplier a little visit to renegotiate the price or prices. Lower costs to stock up shelves with products = higher margins. I was just kidding about the busting the suppliers’ balls part though, what I meant to say was to be tough but fair on the suppliers. Our suppliers are our partners, and long-term business success depends on either sharing the wealth or creating value for all stakeholders.

Don’t under-price your product
Customers are willing to pay for value. So, if you can deliver to your customers a product that creates great value for them, then there will be no reason for you to under-price that product.

Re-evaluate your business
Try and find out what activities create value for your customers and what activities don’t, and try and eliminate or reduce the activities that don’t. Also, think about outsourcing some of your activities to other companies that might be able to perform those activities at a lower cost for you. Whether it’s cutting out activities or outsourcing activities, lower costs = higher margins.

Another proven method to improve your business’ profit margin is, of course, by getting more customers or getting your current customer base to buy more, as by selling more products, your fixed costs get more spread out over a bigger sales volume, which reduces the costs associated with each unit of product you sell, which in turn increases your profit margin. I’m planning to publish an article related to the “customer” sometime in the near future. So please, visit my blog soon if you’re interested.

As always, if you have anything you want to share, please feel free to comment. Thank you for reading, and may you always sustain good returns on your portfolio. Take care.

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