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Small Business Essentials: Healthy margins create higher profits

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These days it’s important for a business owner to double-check margins just to make sure they’re sufficient enough to cover costs and contribute to a healthy profit.

Simply put, margin is the difference between your selling price and the direct cost of the item or service. For example, a baseball hat retailing for $50 with a cost of $20 has a margin of $30. Expressed as a percentage, the margin is 60%.

Generally, the healthier your margins, the better your business will be.

How to improve your margins

It’s not that complicated: You can improve margins by raising prices or reducing costs.

If there is a limit to how much more your business can sell, it’s time to make more money from the customers you already have.

Start by increasing your prices

Very often a small increase in price will go unnoticed by your customers. But even a small increase (like 2 to 5%) can make a big difference to your margin and profits.

  • If customers don’t routinely compare your prices to other vendors, and appreciate the value you deliver to them, chances are they won’t revolt over a small price increase.
  • If you sell items where customers are price sensitive and frequently compare your prices to what competitors charge (such as grocery items), it may be best to increase prices in very small increments or to focus your price increase strategy on supplemental items where price isn’t such a focus.

It’s also okay to be honest and upfront with customers by saying, “we raised prices because we need the extra money to survive.” Most customers want to support local small businesses and will happily pay a little bit more.

Lower supply costs

The other way you can improve your margins is by lowering supply costs. The less an item costs you, the higher your margins.

To lower costs of goods sold, consider:

  • Sourcing a less expensive supplier. Research new suppliers and ask them to submit quote or ask your existing vendors to update their pricing and see what they can do to lower your costs.
  • Purchasing in bulk to save money.
  • Importing items or raw materials from overseas if the math works in your favour.
  • Taking advantage of any early payment or cash payment discounts.

You can also take steps to reduce inventory shrinkage and waste by making sure your inventory system is efficient.

While you’re at it, comb through operating expenses to see what can be trimmed. For example, you may be able to reduce overhead costs for telecommunications, rent, salaries, office supplies, and other regular expenses.

 

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Focus on selling your high-margin items

Another strategy is to concentrate your sales and promotion efforts on products or services with the biggest margins. Check your numbers to see what delivers the highest return—for example, a contractor might be better off focusing on kitchen upgrades instead of painting walls.

  • Be sure to tell your sales team to focus on high-margin items.
  • Consider phasing out low-margin items.
  • Align your marketing campaigns and social media promotions to plug those more profitable items.

Go after better customers

Oftentimes a busy business owner gets caught up serving demanding and time-consuming customers who really don’t spend that much money. A pivot to better customers (meaning those willing to buy your highest-margin items) might be worth considering.

Better customers might be:

  • Closer to your business location and therefore require less delivery expense.
  • Able to enjoy your product or service with less customer support from your business.
  • Higher-income customers who are less price sensitive.
  • Growing businesses willing to pay a premium for superior service or expertise.

Also, please consider only doing business with customers that pay on time, pay in cash, or don’t want a discount. Not having to wait for your money lets you enjoy higher margins by paying less interest on receivables financing or receiving some interest on that spare cash.

Final thought

It’s a good idea to regularly review your margins to check creeping product costs or the effect of sales discounts. You can repeat these strategies every three months to keep enjoying healthy margins in your business.

Free Webinar: 5 strategies to boost business profit and speed recovery

Want to learn more ideas to build profit? Attend our Small Business Month webinar on Oct. 14, 2021 @ 2 p.m. ET.

Register now

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