How to Increase Business Profitability

Profitability is one of the main measures of a successful business. Income can tell you how much money is coming in. Profitability but shows you how much of it remains. For example a business might grow sales impressively, expand its team, gain market attention while at the same time quietly losing money and many actually do that until they are out of cash. How to increase profitability is just not a matter of cutting costs or raising prices. It is actually a set of strategies that apply to every aspect of a company starting from how you acquire customers to the way you deliver products/services, manage human resources, and make decisions for your investments. Businesses that keep on increasing their net profit margins usually do it not by making one big move but by gradually building up a culture of financial wisdom and operational discipline year after year.

Know Your Numbers with Precision

Identifying the areas where a business spends too much is the first step for increasing profit. One has to look at all the numbers honestly and get to see what’s the actual financial situation, for example, of the company. It might even be surprising to know that sometimes the owner and the top management of the company are not aware of the details about which products, customers, and business activities are profitable, and which are a net cash outflow. Before designing the strategy one has to make sure that the business knows its gross margin per product line, its customer acquisition cost per channel, its customer lifetime value per segment, and that it has all its overhead costs listed for each business area. When you look at these numbers the way business value is created and what business practices or customers are subsidizing poor management performance will be clear right away. What frequently happen at this stage is that the company realizes that only a few customers or products account for most of the profit, while the long tail of others is barely profitable or outright loss-making.

Raise Prices Strategically

Price is one of the most potent means to enhance profit and yet it is hardly ever exploited effectively. Majority of the companies, mainly the small ones, determine how much they should charge for their products and services through cost-plus approach – they figure out a cost to produce a good or service and add a profit margin – or looking at being afraid of what their rivals might charge. Unfortunately both these pricing methods do not consider adequately the value that the customer receives. If your product or service can save your client ten hours daily or prevent an expensive mishap, then the price you demand should represent the saving you give and not just your input costs plus a little markup.

Increasing your prices is quite a sensitive move but mathematically it makes perfect sense. Let’s say a business has an average profit margin of 20%. If you decide only to up your prices by 5%, this would not just lead your overall profit to the increase of 5% – it would result in 25%, because your extra income practically becomes 100% pure profit. Although, some clients may get upset and even quit after the change in pricing and there would be others that accept it – still, in the great majority of companies the gains in sales resulting from the higher pricing levels of the remaining customers are several times larger than the losses in revenue from the small number of those that leave. To name only the most obvious tactics, you can start with charging more only to new customers, raise the value to the consumer’s eyes by better packaging, branding or service quality, and finally explain your price adjustment with utmost clarity and conviction as these steps will all greatly help in achieving a profitable pricing policy

Reduce Costs Without Cutting Value

Most business leaders when faced with a profit margin problem, usually the first thing that occurs to them is to reduce the costs, and quite rightly so – but that has to be done precisely. The typical case of a company destroying its value is when a company that cuts costs in a non-selective way, for instance by delivering a product of worse quality, ruining the customer experience, or motivating less the employees. What should really be the focus is not to spend less in absolute terms, but eliminate spending that does not generate a corresponding return.

A systematic cost review should look at every single category of expenditure that is relatively significant and come up with only two questions: “is it really necessary?” and “is the lowest price available for it? If not, then perhaps what is?” For instance, contracts with existing suppliers that have not been reviewed or changed in several consecutive years often represent one of the most promising areas to identify potential cost savings. In case of software subscriptions that were originally bought for certain projects and not cancelled, they slowly add up and the company doesn’t usually notice them. Fixed overhead costs that include things like office space utilities insurance can often be reduced via simple measures of renegotiation, consolidation, or major restructuring and yet the business will still be able to deliver for its customers. Zero-based budgeting, where every item of expenditure must be justified again without any reference to previous year’s figures at the beginning of each time period, is an incredibly effective means of finding out which costs have continued on without being questioned, i.e. based on inertia, rather than on their actual merits.

Improve Customer Retention

Getting a new customer usually costs about five to seven times more than keeping an existing one through retention strategies. Although this is a well-known fact, various companies allocate their major share of sales and marketing budgets to acquire new customers. They also don’t spend much on the relationships that already exist. A percentage point increase in customer retention rate leads almost 8 times increase in revenue because the customer who remains is a revenue generator but not an acquisition cost which usually deteriorates the income from new business.

The first thing you should know is the main reason your customers stop doing business with you which will help you improve retention. You can find common reasons why people churn from different sources: exit surveys, customer churn analysis (group by customer segment) and conversations with ex-customer customers that are truthful will show you that your customer attrition is more than what is perceived when your employees are the only people talking about the customer. The reasons like delay in response, fluctuating quality, absence of proactive communication, and pricing not in alignment with the perceived value are usually the reasons for the loss of customers. They are nearly always solvable once they get clearly identified. Customer success programmes, loyalty incentives, check-ins on a regular basis, and systematic follow-up processes are all forms of retention investments that bring back many times the cost in margin improvement.

Increase Revenue Per Customer

Customer acquisition isn’t the only reason people are brought on board in the form of sales. In fact, existing customers have the highest potential for growth on their life time value (LTV). With upselling and cross selling, the customers can be shown the products, services or higher packages which they are currently not taking advantage of. In addition, a potential customer will have far more difficulty in getting your business to deliver on its promises as compared with a repeat customer who trusts and has experienced your company before. This leads to greater conversion rates, shorter sales processes and the profit obtained will not include the marketing expenses of customer acquisition. A company that is expanding can have no greater opportunity than to figure out all the needs for customers in the target segment, find out which of these needs are not being catered to, and then create products, services or packages that will exactly meet these unfulfilled wants.

Increase Operational Efficiency

Profitability is much more than just the difference between charges made and expenditures, profit can also be influenced by how well a business converts inputs into outputs. Operational efficiency can eliminate margin erosion that would be caused by things like: time wasted on manual processes that could be automated, errors that require rework, bottlenecks that slow down delivery and annoy customers, and the layers of management that just use up the overhead without adding value are all drains on margin that operational improvements can solve. Process mapping, which is the act of documenting work as it is actually done in the business rather than how the business says work should be done, often exposes inefficiencies that people caught up in day-to-day operations do not see.

It may seem paradoxical that a large expense item for technology can result in higher profits. Yet, if the technology is used correctly at actual operational pain points then it very well can. Examples of this are automation which saves people from doing tedious administrative work, elimination of manual data transfers between disconnected but functionally related software, and providing digital tools to the team that help the communication and keep project visibility up to date. All of that reduces work that does not add directly to customer value and That’s why the company saves time and money.

Focus on High-Margin Activities

It is common for businesses to be made of a mixture of activities which create high margin and low margin activities. Market change, competition, and internal change over time naturally lead to business doing lower margin jobs, bigger clients negotiating hard, products that are commoditized and service areas where competition has lowered price power. It is one of the powerful strategic tools to deliberately concentrate on high-margin products customers services, and activities. At the same time, business will have to avoid products, customers, and services that are high in resources input yet low in financial output. Saying no to income that does not much add to profit is an act requiring courage, something entrepreneurial teams usually don’t like.

A revenue-growth margin-up business is constructing something truly lasting and is the key ingredient of any great business strategy. In fact, the secret of profitability is not found in one clever decision alone but rather in lots of discipline and small, consistently well-thought-out decisions from the business.