Your profit margin is a metric that should always be on your radar, and for good reason: it answers critical questions about your business, like whether or not you’re making money or if you’re pricing your products correctly.
It’s important to note though that your profit margin isn’t just something you should measure, it’s a metric that you should continuously improve. As author Doug Hall said, “If your profit margins aren’t rising, chances are your company isn’t thriving.”
To help you do just that, we’ve put together some pointers that can enable you to widen your margins. Check them out below and see if you can apply them in your business:
Lower your cost of goods
Take a closer look at the materials and procedures required to create or source your products, and then figure out how you can get them for less, without compromising the quality.
If you’re selling food, for example, see if you can purchase your ingredients at lower rates. Talk to your suppliers and ask if there’s anything you can do to reduce costs. Do you need to order larger quantities? Are there any middlemen or administrative expenses that you can cut from the process?
Figure these things out then take action accordingly. Let’s say you need to up your order quantities for a particular item to lower its price. In this case, you could look at your inventory data and determine if you can afford to order certain items in bulk. If not, would it be possible for you to consolidate orders for other items (or with other purchasers) to increase your buying power?
This is something that many large retailers have been doing for quite some time now. A few years ago, for example, Walmart sought out joint purchasers for raw materials, so they can consolidate purchases and get more buying clout.
Explore your options and run them by your suppliers to see if you can negotiate better deals. If they won’t budge, don’t be afraid to check out other vendors to find out if they can offer you more favorable terms. (And make sure your existing suppliers are aware of this—they could end up giving you better rates.)
Increase your prices
Raising your prices will enable you to make more money on each sale, thus widening your margins and improving your bottom line. Many retailers however, balk at the prospect of increasing their prices out of fear that they’ll lose customers.
We wish we could give you hard and fast rules when it comes to pricing, but the fact is, this decision depends on each company’s products, margins, and customers. The best thing to do is to look into your own business, run the numbers, and figure out your pricing sweet spot.
On top of considering basic pricing components like your costs and margins, look at external factors such as competitor pricing, the state of the economy, and the price sensitivity of your customers.
Speaking of which, take the time to consider what types of customers you want to attract. Do you want to sell to shoppers would take their business elsewhere just because they could get an item for less, or would you rather attract customers who don’t base their purchase decisions solely on price?
You’d be surprised to find that majority of consumers (though this may very from one industry to the next) may actually belong to the latter group. A study by Defaqto has found that “55% of consumers would pay more for a better customer experience.
Take all these things into consideration; do the math, and once you come up with a price increase, test it on a few select products then gauge customer reaction and sales from there. If the results are positive, roll out the increase across all your products.
You may also want to consider implementing creative or psychological tactics when coming up with your prices, in order to make them more appealing. You can, for instance, incorporate tiered pricing into your strategy.
Check out what shoe retailer Footzyfolds did. In order to combat cheaper knock-offs of its merchandise (they were selling them for $25, while Target had them for $10) the store decided to revamp its prices—but not in the way you might think.
Instead of lowering prices across the board, Footzyfolds introduced a high-end category for their products. With the new pricing format, they lowered the price of their everyday products to $20 a pair, but introduced a new “Lux” category for $30 a pair.
Owner Sarah Caplan told the New York Times that this move helped them increase revenues dramatically. “We actually have had the most interest in our higher-priced shoes,” she said to the publication, and reported that after launching the high-end line in the summer of 2010, they saw revenues increase by 100%.
Finally, remember that the way you communicate your new prices is just as important as the prices themselves, so put a lot of thought into how you’re going to relay the message to your customers. Give shoppers a heads up prior to the price hike; let them know why you’re doing it and how it’s going to benefit them (i.e. You’re bringing in more staff so you can provide a better service, or you’re launching an online store for their convenience.)
Also be sure to communicate your differentiating factors as well as the value that you bring to the table. Justify your higher prices by telling customers (or better yet by showing them) why your store is different or better than the competition. Do you have superior products? Can you provide unparalleled customer support? Do you offer a shopping experience that others can’t? Whatever it is, make sure your customers are aware of it.
Still worried that you’ll send shoppers packing? Don’t be. Recognize that letting go of a few customers may not necessarily be a bad thing. For one, the right price increase could improve your bottom line significantly enough to offset the amount of lost sales from shoppers who decide not to buy from you. Additionally, having fewer (but higher quality) customers helps lower operating expenses while increasing service quality at the same time.
Reduce operating expenses through automation
Automation can do wonders for your productivity as well as your bottom line. By putting repetitive activities on autopilot, you can reduce the time, manpower, and operating expenses required to run your business.
Go through all the tasks that you and your employees complete day-to-day, and see if you can automate any of them. Are there any cumbersome activities that are eating chunks of your time? Do you have to re-enter any data or perform certain steps more than once? Take note, and then look for solutions that can take care of them for you.
Take for instance, Crane Brothers, a contemporary menswear retailer. To save time and operating expenses, Murray Crane decided to automate the task of transferring sales data to his accounting software. Rather than manually plugging the numbers into the program, he integrated his point-of-sale system with his accounting software (Xero). He got the two tools talking to each other so that information is automatically transferred from one program to the next.
The result? Murray was able to free up time so he and his staff could devote more energy to helping customers. He also estimates that the automated system in his store saves him forty to eighty hours a week—or one to two full-time employees.
Data entry isn’t the only thing you can automate. These days, there’s (usually) an app for most of the boring administrative tasks in your store.
If you regularly make appointments with customers for example, consider using an app such as Timely, which streamlines bookings and sales, and even sends automatic appointment reminders to your customers. Do you spend a lot of time managing employee shifts? Check out Deputy, which lets you and your staff coordinate schedules from your mobile devices and sends shift changes and notifications for you.
Optimize vendor relationships
Earlier in this post, we talked about negotiating better contracts with your suppliers to reduce the costs of goods and widen your margins. If you want to take things a step further, consider building stronger relationships with your vendors. Ask if there’s anything you can do to make things easier or more cost-effective for them so they can fulfill your orders in a more efficient or cost-effective way.
That’s what photo digitization service ScanMyPhotos.com did. President and CEO Mitch Goldstone says that collaborating closely with their vendors enabled them to enhance their business processes. “We invite our vendors to think of us as a partner. The better we do, the better they do. The process is simple, just ask vendors to help improve your workflow.”
Goldstone shares that they even invited one of their vendors, the United States Postal Service, to visit their headquarters. “We asked them to study our entire shipping operation and the technology that drives our fulfillment services. Many, many elements we thought helped streamline the business, were all wrong and the USPS marketing team became our best partner to reinvent everything.”
See if you can do the same thing in your business. Strengthen your relationships with vendors and determine how you can work better together. Doing so could help you identify ways to reduce product costs and operating expenses. Or, at the very least, it could improve your workflow and productivity.
Personalize your offers
Another effective way to widen your margins is to offer tailored discounts. Remember that not all customers are wired the same way. Some people may need a 20% off incentive to convert, while others don’t really require a lot of convincing.
Instead of killing your profits with large, one-size-fits-all offers, identify how big of a discount is necessary to convert each customer.
Case in point: Online bicycle retailer BikeBerry.com. The e-tailer sought the help of big data company Retention Science to analyze customer behavior and gather intel on their customers’ past purchases, browsing history, and more. This allowed them to get to know their customers and figure out the most cost-effective way to convert each one.
They then created a series of email campaigns with five different discount offers tailored to each individual. Customers received one of the following offers in their inbox: Free Shipping (which is huge because shipping costs can run high for bikes and other accessories), 5% off, 10% off, 15% off, and $30 off new products.
The campaigns ran for two months and within that period, BikeBerry not only increased sales, but they were able to widen their profit margins by not offering discounts that are too big to customers who would convert at a lower threshold.
See if you can do something similar in your business. Instead of offering blanket discounts, go through the purchase histories of your customers, then personalize your offers based on their behavior and preferences. Doing so won’t just increase the chances of conversion (people are more likely to respond to an offer if it’s relevant to them), it’ll also help you maximize your margins.
You don’t always have to make drastic changes in your business to significantly improve your bottom line. As this post has shown, sometimes a simple tweak in your pricing or a phone call to your vendor can pave the way for wider margins.
Can you think of other tactics that can help retailers improve their profit margins? Let us know in the comments.