Whether you own a physical store or an online store for your products, you’ve heard about and maybe even worried about your profit margin as a business owner. To explain simply, the profit margin is the portion of the money you take home with you, and it is computed by deducting the expenses from the revenue. A reasonable profit margin varies for different business owners, industries, locations, and circumstances.
In your whole journey as a business owner, you would encounter three types of profit margins. These three types are: gross profit margin, which refers to the business profit after deduction of the cost of goods sold (COGS) and is most helpful in knowing the profitability of certain items; operating profit margin, which is computed by deducting the COGS and the operating expenses (OPEX) from the revenue which better gauges the profitability of the business and; net profit margin which deducts both COGS and OPEX but also interests paid and income taxes and is the best indicator of profit margin.
As a business owner, you’d always want to increase your business profit and knowing these three types of profit margins would help you analyze what needs to be adjusted - is it your COGS? Your OPEX? The interest? This is a way to be competent in strategizing how to increase your profit margin. But that’s not all! This article will give you more tips on how to increase your profit margin and help you elevate your business to the next level.
How To Increase Your Profit Margin?
• Innovate and Intelligently Implement
One way to increase your profit margin is to keep surprising and satisfying your customers at the same time. This not only helps prop up the business profit but it can also significantly improve your brand identity. In this world that keeps on turning, it is vital to keep up with the times. This means that you must always attempt to either be with the “in'' or shine and set your market. Your products don’t always have to be new. It just has to be suitable for what your target market needs at the moment. It’s essential to always have business ideas in your mind on how to take your business to the next level. But more importantly, you must also learn to always be strategically brilliant in handling all your business endeavors. Another sure-fire way to increase your profit margin is to ensure the efficiency of your entire production process. You have to note how well your machines, your production team, your materials, your packaging, and your delivery partners are working together to raise sales and business profit. Double-check your production flow from the supplies’ arrival up until the delivery of your products, and be wise. Try to identify if there are points of improvement or ways to expedite it a little. If your ideas and your production process are intelligently utilized and managed, you can genuinely increase your profit margin. Manage your products with the flexible order management system offered by Strikingly, which gives you the ability to add, reorder, and hide products easily. You can also easily set up shipping options for your products and efficiently handle your transactions.
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• Reduce Your Costs
Make sure your costs are not costing you too much. That is, you have to make sure that the benefits you are getting are worth your costs. This is where the operating profit margin comes helpful. Your operating expenses are those that are necessary for business operations. They are usually not attributable to particular products or even categories of products because they encompass the expenses for the whole business. Examples of operating costs include advertising and marketing fees, license fees, office equipment and supplies, maintenance and repair costs, payroll and the likes. Knowing your profit margin tells you how much these expenses are costing you the revenue they are producing. In addition, you can easily adjust these costs as you see fit. Your profit margin can significantly be increased when you eliminate or reduce these types of costs. Maybe you can find more cost-efficient ways to advertise or find equipment and supplies that are not as costly but are still of quality. You can still function at your best and avoid frequent repairs or other ways to reduce costs without sacrificing quality. You can also look at your gross profit margin because maybe what you can improve and modify is your cost of goods sold. Nevertheless, the key point is to be smart in where you spend your money. Your costs play a big role in your profit margin so make sure you are handling them right.
• Prioritize Average Order Value than Per-Order Profit
When running a business, you are often more concerned about each order/sale of your product. And while that’s just practical and intuitive, note that there are certain circumstances where it is much better to forgo one order if it means appeasing your customers. For instance, if your customers received a partially damaged product, it might cost you less to send them a replacement rather than trouble them with a return or refund. In addition, customer loyalty and customer reviews are always more valuable than a couple of orders. Therefore, it might be a better use of your time and resources to focus on average order value concerning this. This is an excellent way to improve your profit margin as it makes for an increase in sales. Average order value refers to the average amount customers spend on transactions. This is computed by dividing total revenue by the total number of orders by a customer. You can boost this by coming up with different promos and deals to make your customers buy more. This can be in bundles and group deals, offering coupons for products with higher profit margins, cross-selling products with complementary items, or providing incentives for minimum orders. If you have an online website, it might also be a good idea to promote these deals and/or add other product recommendations to your checkout page. Strikingly allows you to customize your checkout messages, which you can utilize to promote your products, increase your average order value and upturn your profit margin.
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• Identify Who’s Helping and Who’s not
Another way to increase your profit margin is to identify which of your products take center stage and which ones have been on the bench for a while. It’s essential to know and understand how your products are being perceived and accepted by your customers. You have to frequently analyze each of your products' performance because you might be spending much of your time and resources on a kind of product that does not even sell that well. Your gross profit margin comes helpful yet again in this aspect. You can use the gross profit margin formula for each kind of product to know how much profit it has been bringing in the business in relation to the expenses spent for its creation. By doing a break-even analysis, you can quickly know the actual value of your products contributing to the business profit. You can assess and pinpoint the product to smartly focus your attention on. Furthermore, if some of your products are keyed out to not be worth it, then maybe you have to think about letting them go. Still, considering your operating and other expenses, you have to come up with a plan that properly allocates to and prioritizes the high-performing products as opposed to underperforming ones to boost your profit margin.
• Take Care of Your Customers
Whether you are operating from a physical location or from behind an online store website, you have a responsibility to make your customers happy and at ease. Fulfilling this responsibility is what keeps your business profit and profit margin going. For this tip, let’s focus more on how you do this with a website. As if a marquee in a physical store, your banner image and your home page are the first thing your customer sees. You then have to make sure that it is appealing to the eye and easily entice your customers to explore more of your site. You also have to give them easy access to your products by displaying them in a very organized way. It might also be an intelligent move to display product reviews or even post blogs about your products. Hearing from other customers helps customers trust you and your business more. If more people trust you, then your business profit can considerably increase. Furthermore, you can also create a customer loyalty program. You can collect your customer’s email by adding a contact form on your site. You can use these emails to send them a discount code to use in their next purchase. Maybe you can also develop sales discounts, rewards or perks, or even exclusive sales for your loyal customers. Returning customers means that you have built a following and established trust between you and your customers, and in the long run, that is ultimately good for increasing your sales and profit margin.
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• Look At Your Pricing
Sometimes, the problem isn’t with the costs at all. As a business owner, especially if you’re one with many products under your belt, you have to be clever in pricing your products. There are many product pricing methods and strategies that you can experiment with to find the right one for your business and your products. Do not be afraid to increase your pricing, especially if you have reasonable explanations to back up the increase. Your loyal customers would not quickly leave you for a bit of a pricing hike. To test which kind of pricing model works best, you can use your profit margin formulas. You can come up with forecasts or use historical numbers of sales to gauge how a specific price would work. But keep in mind that you can also lower your prices if upon the analysis you found that the price for your products is too high and that your business can earn more with lower prices. Carefully consider the right move for you and your business profit. With the right pricing strategy, your profit margin can rise exponentially.
Learning all about the different types of profit margin and their purposes will be very useful as you manage your business to success. Your profit margin, after all, says a lot about your business profit. And we hope that these few tips and tricks help you increase your profit margin. Finally, as a last minor tip for you, we recommend building your business website if you have not already. With website builders like Strikingly and features like Simple Store, you can set up shop online and reach a far wider audience.
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With the right tools and strategies, you have the potential to grow your business meaningfully. Your hard work, perseverance, and creativity deserve to bear much fruit. And your profit margin can be a good measure of the number of baskets you fill. Sign up with Strikingly and help them help you make the most out of your business!