There are all sorts of ways that business owners measure success. It could be the number of units sold, the amount of seed capital raised, increases in website traffic, more conversions, increased buzz about their business, or any other number of things.
In the end, there is only one real measure for success in for-profit businesses: profit. After all, if you don’t make a profit, no other metrics matter. Profit is a simple concept in theory – it is nothing more than the difference between your wholesale costs and your retail revenue. However, there is nothing simple about it.
More specifically, the variance between what it costs you to buy or make a product and what you can eventually sell it for is called your profit margin. Ideally, that will be a fairly big number, expressed as a percentage. For instance, if you can buy a widget for $3 and sell it for $5, your profit margin is a healthy 40% (you make $2 on every $5 sale, 2/5 = 40%).
Some businesses, like restaurants or discounters for instance, typically have a very low profit margin (in the single digits). They make up for a low margin with volume sales. Other businesses sell less, but at a greater margin. Either way, the question almost all small business owners have, whatever their margin may be, is how can they increase their profits?
Here are three ways to increase your profits. They are:
1. Increase your prices: No, you probably don’t want to raise your prices, but take a look at the big picture: People are your customers for all sorts of reasons. There are things you do as well, or better, than your competitors. It might be your:
You will notice that price is only one of many different things mentioned in this list. The reason is because, unless your essential value proposition is that you are the least expensive (which is unlikely), then people choose your business for many reasons, price being just one.
Overall, while no one likes raising prices, and the fear of losing customers as a result of a price hike is a legitimate concern, it is equally true that all businesses raise prices. Consider this: When was the last time you stopped patronizing a business simply because they increased their prices? Right, that doesn’t happen very often.
So, if you want to make more money, and especially if you want to increase your profit margin, then consider charging more for your products or services. If you are still worried that it will turn-off your customers, test the new prices first before rolling them out across the board.
2. Sell more: If you don’t want to increase your prices but still want to increase your profits, then your second option is simply to sell more. Selling more means you will make more. Yes, this is self-evident, but it is also a fact.
One way to do this is to do an 80-20 analysis. The 80-20 Rule states that 80% of your profit (or sales) come from 20% of your products or from the top 20% of your customers. So the question to answer is this: What are your top 20% products? Who are your top 20% customers? That small percentage of products and customers account for the vast majority of your sales.
Once you know the answer to that, then the path to more sales should be evident: Concentrate on those sorts of valuable products, find more of that type of customer, and you will make more sales that will make you more money.
3. Decrease your overhead: Think again about that profit equation I mentioned earlier: Profit is the difference between costs and sales. The first two ways to increase profit have to do with increasing sales. The other way relates to the first part of that equation – decreasing your costs. Selling the same amount at lower costs yields increased profits.
The challenge is figuring what to cut, and then how to cut it in such a way that it doesn’t eat into sales. Cutting overhead must be done with a scalpel and not a cleaver. Be judicious. See if you can find a cheaper supplier, or if you can reduce labor or insurance costs. Buy in bulk. Give employees an incentive for keeping costs down.
Increasing your profit is certainly possible, but it will require keeping close tabs on your margins and finding ways to alter the profit equation to your advantage.
About Steve Strauss
Steven D. Strauss is one of the world's leading experts on small business and is a lawyer, writer, and speaker. The senior small business columnist for USA Today, his Ask an Expert column is one of the most highly-syndicated business columns in the country. He is the best-selling author of 17 books, including his latest,The Small Business Bible, now out in a completely updated third edition. You can listen to his weekly podcast, Small Business Success, visit his new website TheSelfEmployed, and follow him on Twitter. © Steven D. Strauss.
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