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Five steps to increase profit margins

Oct 12 2015 10:33
*Pieter Scholtz

Overcoming the mental hurdle of a price increase is often more challenging for business owners than for their customers. This doesn’t apply to significant increases, but most customers won’t even notice a small price rise. The 5% that do complain are the 5% that already complain.

Price increases also don’t need to be applied simultaneously to all products and services. Starting with the slower moving 80% of products or services can help transition the price increase, with an increase on the final 20% of the fast sellers being implemented last.

But increasing prices to increase margins does need to be done because gaining higher margins is the fastest way to boost profitability. Here are some ideas for how to do it:

1. Stop discounting

Constantly discounting products or services may make customers think that the normal prices are a rip-off. They may also hold out on buying a product because they’re waiting for a discount in the near future. Instead of discounting, business owners can focus on add-on value.

2. Exclusivity

The strategy of exclusivity allows businesses to increase their margins because customers can’t get the exclusive brand they offer anywhere else.

However, it’s important that businesses are not too greedy – research teams should ensure the target market can still afford what is being offered. Businesses can look for something special that nobody else offers and make that exclusivity a feature in their marketing.

3. Sell more big-margin items

Assessing how much margin each product makes is a valuable sales tool for improving overall business margins. Once this has been established, stocking or selling primarily these things will boost the business’ total margins.

When it comes to services, businesses should focus on offering those that make the most money for the least amount of effort.

4. High quality

When a business is not selling quality products and services, it’s more difficult to raise margins and expect people to be willing to pay extra for them. Businesses that only sell quality goods can charge more. It is important to note that the product or service must still be affordable to customers.

Businesses can affirm the value of the product or service by constantly emphasising it when dealing with clients. Part of the quality experience is also the service that customers receive, so quality service adds confidence to customers’ purchasing decisions.

5. Self manufacture

When there are no middlemen, businesses make more money. And this is especially true for business that sell products which they can manufacture themselves. Business owners who manufacture their own products can control the price of their lines when necessary to undercut opposition.

Focusing on manufacturing simple products that won’t create delivery challenges or cause budget overruns can reduce costs, increase margins and even potentially create additional revenue streams for selling manufactured products on to other suppliers.

* Pieter Scholtz is the co-master franchisor for ActionCOACH in Southern Africa.

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actioncoach  |  opinion and analysis
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