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How to Increase Your Small Business Profit Margin

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Increasing business profit margin is the priority of every entrepreneur. Luckily, achieving this is not complicated when you know the right strategies.

In this article, we’ll list 20 techniques that you can use to increase your business profit. But first, we need to review what exactly is the profit or profit margin of a company, and why learning to calculate it will help you better plan for the future of your business.

What is the Profit Margin of a Business?

The profit or profit margin of a business is the percentage of revenue that results after deducting costs such as interest, taxes, dividends, and general and operating expenses.

A high percentage indicates that the company generates many profits for every dollar that enters the business. If this indicator is low, the news is not good. This means that high operating costs reduce your earnings for every dollar of your income.

You can use this indicator to assess the financial health of your business, and thus take steps to increase your profits. The profit margin is also used to compare a company’s performance against its competitors and to estimate its growth potential.

Profit Margin Formula

The formula for calculating the profit margin is very simple. You just have to subtract the expenses from the total sales and divide the result by the same total sales. The result of this operation is the profit margin:


Don’t confuse a company’s profit with its income and cash flow. How are these three concepts different?

  • Profit – It’s the financial earning received when the income of a company exceeds the expenses and costs necessary to keep it running.
  • Income – It’s the money generated by a business for the sale of goods or services, before deducting any expenses.
  • Cash Flow – It’s the money that moves in and out of a business.

20 Easy Strategies to Increase your Profit Margin

Knowing the profit margin of your business will allow you to identify opportunities to improve your profitability because you will be aware of how you are investing your company’s income and where you need to make adjustments.

These 20 strategies focus on different areas of any business, are easy to implement, and will help you spend less and earn more money.

1. Cut unnecessary expenses. When it comes to increasing your profits, every penny counts. Identify how you invest the money and eliminate any unjustified expenses that don’t add value to your company or help it grow.

Start by reducing overhead costs: unsubscribe to services you barely use or switch to a cheaper plan, save water and energy, and optimize the use of the space or equipment you are renting.

2. Increase prices. If there is enough demand, you can increase the price of your products or services. Although it can be a difficult decision, especially for small businesses, it is sometimes necessary to ensure the long-term survival of your company.

3. Create your own business website. Make sure your potential customers find your business on the Internet. A basic site that you can easily make yourself will contain the name of your company, its location, and contact information. A website will give people the opportunity to interact with you, and to know what you have to offer them.

4. Start selling online. In addition to promoting your products and services, your site can become an online store. There are platforms that allow you to add this feature to your website.

5. Take advantage of the email. With an email marketing campaign, you can show your products or offer seasonal promotions.

Create a customer database with the email addresses of your buyers, and send them a weekly or bi-monthly newsletter. Ask your customers for consent before sending them messages and offer them the option to unsubscribe from the newsletter.

6. Create a blog. A business blog can position you as an opinion leader. It is also an excellent marketing tool to connect with your customers, bringing them useful information and solving their problems.

7. Make the most of social media. With billions of users, platforms such as Facebook or Instagram have become the most effective communication channel with consumers.

You can communicate in social media the spirit of your brand, interact with your customers regularly, and answer their questions.

8. Create a content marketing strategy. In addition to a blog, you can create content through videos, podcasts, images, infographics, and e-books. Offer customers relevant content: record a video and teach them how to prepare a recipe, use Pinterest to show them your new products, or tell them about a current topic in a podcast.

9. Optimize your website. Use SEO tactics to make your website be among the top sites for search engines. SEO strategies (Search Engine Optimization) include, among others, the use of keywords that users enter to search you on the Internet, the improvement of the download speed of your website, and the optimization of your website to be seen from mobile devices.

10. Ask your customers for positive reviews. Whenever you interact with your followers on social media, ask them to leave their comments and suggestions, but also positive reviews about your business.

This strategy is an excellent way to increase sales, as people trust these types of reviews as much as personal recommendations. If your customers are satisfied with your business, they will be pleased to write a review.

Positive reviews will attract more customers and boost your sales.

11. Offer gift cards. This payment method can be purchased directly at your establishment or in your virtual store. They are one of the most popular forms of payment, mainly on special dates. They are safe, easy to use, and can generate income for your business in low seasons.

12. Offer student discounts. This sector of the population has great purchasing power. Students have the potential to become long-term clients, and you can easily attract them to your business using social media.

13. Apply for financing. If you want to expand your business, a loan can give you access to the resources you need. If you invest the funds properly, you could get a high return on investment.

Camino Financial offers financial solutions with minimum requirements that adapt to the specific needs of each business owner. You can access a loan in just 2 days, and to apply you only need to generate annual sales of $30,000 and have been operating your business for at least 9 months.

14. Turn your employees into sellers. Each of your employees can become an ambassador of your business and convey your company’s message. Encourage your employees to talk directly with customers and tell them about your offers, or to use their personal social media to promote your services.

15. Hire independent employees. Contractors are very useful for performing specific tasks, and in many cases, it’s a better and cheaper option than hiring full-time employees.

Independent professionals such as marketing specialists, lawyers or accountants can do specific jobs, and you don’t have to pay them for social security or additional benefits.

16. Improve your relationships with suppliers. Negotiate better agreements with your suppliers to reduce costs. Ask for discounts, free shipping or some free products. If you usually buy in large quantities, they may agree to give you better deals.

17. Reduce costs in the distribution chain. Sometimes, transporting supplies and products from the factory to your business is more expensive than it should. Loading the truck completely and reducing the number of deliveries per week can be used to reduce costs.

18. Expand your business to other markets. If your local market is saturated and offers no more options to grow, consider expanding to a location with less competition.

Research what markets might have a demand for your products or services. The cost of moving to new areas can be offset by an increase in sales.

19. Perform an internal audit. An accountant or consulting firm can carry out a detailed review of the expenses and income of your business. Thus, they can point out specific high costs that could be reduced, or give reasons that explain the decrease in your income.

20. Eliminate products that leave no profits. Products or services with higher profit margins are the most important for your business. You must concentrate all your efforts on them. Others, on the contrary, can be a burden to your finances.

Identify the products or services that don’t contribute to your business, study whether it is feasible to improve them, or if simply removing them is a better choice. If you have a restaurant, you can do a menu audit.

To Sum Up…

Knowing your business profit margin will let you know where your company’s income goes exactly and what expenses are taking away profitability.

This indicator will also help you make the necessary adjustments to change the direction of your business and make it more productive.

Luckily, there are many strategies you can use to increase your income. Try those that best suit your business, and also combine them: that’s the most effective way to make them work.

Do you want to learn more about business administration and finances? Subscribe to the free Camino Financial newsletter. Our goal is to deliver quality content that helps you improve your finances, earn more and grow your business.

 

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