Here are my three favorite “profit levers” for you to adjust to increase your company’s operating profit margin.
I know you may be thinking, “If I raise pricing I’ll lose customers, or won’t make as many sales.” I understand this fear. It may even be warranted. But my experience has shown that 7 times out of 10, a small business owner (sales under $10 million/year) can increase profitability by strategically mapping out a price increase on its products and services.
Now you have to be smart about this. For example, you may want to do a quick “margin analysis” and see profitability by key break down (e.g. by customer, by product type, by niche, etc.) and start with one client type or group, or with a few of your less profitable service or product offerings.
Pick a date at which time you’ll raise pricing on all new clients coming in. Consider planning out a sales campaign to “sell into” that price increase.
Then go back to your existing clients and raise pricing in a thought out way. If you have a group of clients that are low margin, consider raising their pricing first. Also, you may even consider rolling out the price increase in waves to sub-parts of each group which gives you time to fix any glaring errors in your thinking without going straight to all your clients.
If you take nothing else away from this article, please take this key point – review your pricing with fresh eyes.
Two: Retain More of Your Clients Longer
Every new client is expensive. You’ve got sales costs, marketing costs, and generally higher delivery and support costs as you must train in this new client how to best work with your product, service, and company to get the desired benefits.
- By retaining more of your customers for a longer period generally you’ll see a real lift to your operating profit margin. Here are some simple ideas to combat attrition…
- Identify your key “drop points”. Knowing where you are losing customers helps you get strategic about what to test to fix the leak.
- Improve your schedule of communication so that you effectively close up your known “drop points.”
- Deepen the relationship. Get personal with them. Share authentically. Make the relationship more than just “costs/benefits.”
- Increase the costs (financial, time, convenience, etc.) of switching or moving away from your product or service.
- Expand your roots in your customer’s lives — become so easy and indispensable that they wouldn’t think of leaving you. Build relationships with more of their team; integrate with more of their systems.
- Negotiate a longer contract term.
- Upgrade your value. What can you add that would delight them? What can you simplify or eliminate that would give them a better experience?
- Help them jump right past common drop points by doing some of the work for them. For example, when I buy a kindle Amazon preloads my account information on the device so it’s ready to use right out of the box.
Three: Control Expenses
- Redesign workflows and systems for greater efficiency. Cut steps, reorder processes, reengineer physical workspaces, etc.
- Eliminate tasks and activities that don’t add value to the company or customer. Every dollar you save by eliminating the cost of things that don’t add value to your company or to your customer drops directly to your bottom line.
- Give your team a clearer picture on ways they can contribute to profitability. Every team member is an agent to increase profitability. Empower them to be part of this search for ways to increase profitability.
- With all your activities and business parts, live by the precept: Feed your winners; starve your losers. This includes with your marketing activities, your sales force, your general staff, your company initiatives, your reporting, etc. So cut your losers, and feed a portion of the saved time and money into your winners. This will greatly boost your profitability.
- Stabilize your production systems so that you can reduce need to stock as much inventory and raw materials which are a drag on your cash flow and on your gross profit margins.
There you have three often overlooked ways to increase your company’s profit margin.