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How to increase profit

Increasing profitability often depends on doing many small things, rather than making one big change. Discover how to increase your profit.

Profit margins are fundamental to success and growth in business. There are two ways that you can increase those margins – reducing costs or increasing sales. Aim to take small steps so you keep your loyal customers on your side.

Find ways to cut costs

Identify the steps you can take to minimise your direct costs, such as by:

  • Negotiating lower prices with your suppliers
  • Reviewing processes and systems to minimise wastage
  • Implementing additional security to reduce the chance of theft

Review your supply chain

You could save a considerable amount of money by renegotiating your supply deals on a regular basis – or at least by keeping an eye on the market. Costs that could be regularly reviewed in your business include insurance, electricity, and mobile and Internet costs.

Make your processes more efficient

  • Cut your raw material costs by reducing wastage
  • Increase production line productivity by introducing lean manufacturing techniques
  • Reduce the amount of money spent on stock by implementing just-in-time ordering

Look at all your business’s processes and brainstorm ways of making them more efficient in order to save money. You could, for example:

Increase your margins with small, frequent improvements

It’s critical you keep a close eye on your competitors’ prices in relation to your own. Your customers will have more respect for the way you operate your business if you implement minimal price increases when you need to – so they don’t even really notice.

There are two main ways of boosting your business’s profit margins:

  • Reducing your costs
  • Restructuring your prices

Focus on small increases in prices and minor cuts in your costs on regular occasions. You may be able to slowly increase your profit margins if you go about this in a smart way. Hitting your customers hard in the pocket with significant increases will see them looking elsewhere.

Plan ahead

Smart planning helps you to anticipate problems and adapt as circumstances change, while allowing you to set goals and measure performance.

Set measurable targets to monitor how effectively your plans are being implemented. Then review what you’ve achieved so you can learn from your experience and make continuous improvements.

Look for ways to increase your profit

Try to find ways that increase your prices and boost your profits without your customers noticing. For example, you could focus your efforts on your most profitable customers. Look after the customers who place large or frequent orders, pay the full price on time, and are low maintenance.

Encourage customers to buy more – and to buy more frequently

If your loyal customers increase the amount they spend at your business and the frequency of their visits, your profits will increase accordingly. Encourage your customers to spend more by:

  • Stocking a wider range of products (with decent profit margins) and introducing complementary services.
  • Setting up a loyalty programme that rewards them for frequent visits.
  • Up selling and cross selling

Introduce complementary goods or services with higher profit margins

When introducing new products or services with higher profit margins, choose ones that your customers have expressed an interest in buying. For example, if you sell mobile phones, consider stocking such high-margin products as tablet computers, laptops and electronic gadgets.

Could you offer products or services that are in some way unique or unavailable locally? This would:

  • Set you apart from your competitors
  • Justify higher prices
  • Boost your profits

Review your profit margins

Businesses that offer a range of products can use a simple technique to improve overall profitability. This involves reviewing sales and profit margins periodically, and dividing products into four categories. They are:

  • A high percentage of sales and high profit margins – nurture these stars.
  • 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.
  • A low percentage of sales but high profit margins – consider this a sales push;
  • A low percentage of sales and low profit margins – eliminate these where possible.

Take into account any possible effects before making decisions. For example, a low-profit product might be used as a loss leader to attract customers.

Focus on items with higher profit margins

Calculate your profit margin on each product in your range. Consider withdrawing products with a low or very low profit margin. Devote the extra shelf space to products with higher profit margins.

Begin by introducing limited quantities of new or alternative products with higher profit margins and monitor their sales. Incorporate those that are popular into your regular product range.

Similarly, if you offer services, identify the services that deliver the most profit to your business. Discontinue services that aren’t very profitable – or add value to them and raise your prices.

Next steps

  • Look for ways to cut costs in your business. Ask your accountant or business advisers for input – they’ll be able to identify any expenses that look excessive.
  • Come up with innovative ways to increase sales

This guide is intended as general advice only, and not intended to cover specific circumstances and needs. The information in this article is also not linked to any of the products offered by Clydesdale Bank PLC.

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