Are you seeing positive sales figures on the top line but struggling to generate gross profit that you’re happy with? It might be time to think about ways to make your margin healthier, even just a few course corrections can make a significant difference to the bottom line. Read on for 5 areas of the business that can be optimised to support a healthier margin.
1. Review and adjust your pricing (carefully)
Pricing is such an important part of the equation when trying to lift the margin you’re making. Undervaluing and selling your products or services for less than they are worth is simply saying goodbye to income the business should be making. It’s important to do your research into how much comparable products or services are sold for in the market. You can do this a number of ways, including online research.
Having an up to date picture of your market and the average costs of what you sell is an absolute must. The challenge that many businesses face is the process of taking their pricing from
$A to $B.
Adjusting your pricing is a sensitive issue, but sometimes it’s a necessary move to protect or increase your margin. Price adjustments are harder for some businesses than others, particularly those where prices are fixed and well publicised. Recently with the effects of inflation on the economy, a huge number of businesses have been lifting their prices to simply protect their income as costs of goods and services sold soar.
Here are some common ways to manage a change in pricing carefully:
Prepare your current customers well with a long lead in time and plenty of communications about planned price change.
Tap into your customer database and get ahead of any cost increases that may be planned. Direct email communication is one of the most popular methods.
Be clear that prices are changing, but also provide context around the reasons for the change. Make sure these reasons relate to the continuity of the business and the quality of what you provide to customers. Don’t talk about margins with your customers!
Find ways to add value beyond what customers currently get - there may be some initiatives that you as a business can introduce that don’t have a big material cost but can improve perception of the business.
Make sure that you and your team are nailing the customer service aspect of business - this goes a long way, especially in today’s world where many businesses are falling short of the standard for service. Customers will remember the way a business makes them feel when they interact with them.
Follow through on planned price changes, when you say you’re going to.
Don’t commit to no further price changes if you’re not 100% sure they aren’t coming in the foreseeable future.
Proactively suggest any bulk discount or subscription offerings you have that could save the customer money long term - it may be that loyal customers are willing to commit to your business more in the interest of better deals.
Calculate the price change carefully - this is a big change so it deserves proper consideration based on available financial data and a view of the margin % you’re aiming to achieve.
2. Address inefficiencies
When operations become bloated and processes needlessly complicated, the bottom line suffers. There are multiple levers that can be pulled here, and there’s certainly no ‘one size fits all’ strategy to making a business more efficient. What is common is the sheer number of small aspects that have room for improvement. Often it’s the combination of multiple refinements that make the tangible impact on profit margin. Inefficient businesses will often become such over a gradual process - especially when they get busier or grow in headcount.
Some common inefficiencies to be looked at in your business include:
- Doing everything manually - ‘old school’ ways of accounting, reporting, spreadsheet work and fulfilling orders demand a huge amount of time from people. Those same people could be far more productive if equipped with the right tools. Even in 2023, there are many businesses that manually manage the business when excellent tools and automation exist at affordable or free prices. List out the various tasks in a typical work week and look into options to handle this via technology.
- Undertrained team members - without adequate support and ongoing upskilling your team can end up doing parts of their job slowly or in needlessly complicated ways. This can even lead to low motivation which is so damaging to efforts to improve margins. Keeping your team cared for, continually developing and happy is such a good investment.
- A poorly managed supply chain and inventory practices - if you’re a business that sells tangible products, there’s much detail to get right such as how much stock to hold, when to order, reducing wastage, negotiating transport costs and so on. Optimising the supply chain is an entire process in itself. For now, start to review each of the costs (both time and money) associated with your inventory and supply chain - some of your margin gains could be here.
- How your team communicates - this one is massive, and we see it really impacting businesses a great deal. And while it’s not always a simple fix when poor comms stems from a deeper workplace culture issue, for many businesses introducing some simple processes and tools can make a world of difference. For a small-medium business it can be easier to affect such change, and involve everyone in the solution. Larger businesses may take longer to properly understand the issues and how to solve them. The solution could be having a central channel where deals and customer contact are captured. There may also be merit in an agreed group messaging solution. Sometimes the solution exists in how the team talks to each other and how often. When communication is improved, there are fewer dropped balls, opportunities are seized more and customers are kept happier. Problems originating from poor communication are time consuming and cost the business. Fixing them could be a game changer to your margin.
Is your business reliant upon suppliers of products, services or tools to provide your offering to your customer? As you grow and learn more about your needs, you may want to consider negotiating directly with each supplier around ways to bring your costs down. If it’s wholesale materials or products you’re purchasing, discounts per unit typically come available at bigger order levels. You may also find some suppliers will offer better rates with a longer commitment.
Having long-standing relationships with suppliers built on respect makes it much easier for productive negotiations around price to occur. As is often the case in business, if you look after your suppliers as a valued customer, you can expect the same back.
4. Increase your average sale value
Whether you’re a product or service based business, the concept of average sale value is something that all business owners should keep at the forefront of their mind if margin is a concern.
Average sale value is different from pricing of specific products and services, although it will be influenced by it. The idea around increasing your average sale value is finding ways to maximise the value of your offering to customers beyond single services. A popular way of doing this is by providing some incentives for spending more, such as a threshold around free shipping, or a free gift with orders of $X.
You should also consider ways to make interacting with your business a joy for customers that they spend more time per ‘visit’ - either in person or online. For example, if you run a hair salon, consider details such as how your team interacts with customers, the decor of the environment, the presentation of your hair care products and any in-salon deals you could present somewhere.
If you run an online business, think about the user experience of your website and the process of adding products to a cart and checking out. Are you making it not just easy but a pleasure to use? Have you offered a number of options for payment to remove friction? Are you bundling products at a discount? Focusing on these details can lead to an average higher sale value.
Beyond this however, it’s important to remember that there truly is no replacement for good customer experience and service. As much as we’d love to think we make decisions purely from our brain, the fact is many customers make heart and gut calls constantly. If you focus on being a business that customers feel proud to support, you should see this reflected in your average sale value.
It’s important to note here: growing rapidly without the right checks and balances in place is not going to improve your margins - quite the opposite in fact. Growing pains are unavoidable, but our goal with our clients is to make sure that they methodically move through different stages of growth by putting processes in place to manage what will essentially be an evolution of their business.
With this in mind, growth is typically part of any business’ plans. One of the ways that margins can be increased is by carefully testing and entering into markets or offerings where the input required is the same but the output is better. Or, certain new services or products may actually demand less effort for the same or better returns. A mature business will often have a portfolio of services or products and have accurate data around the margin associated with each offering. Sometimes the smaller margin offerings may add value in another way, such as cross sell opportunities (even as a loss leader in some cases).
RightWay’s Business Partners can help!
Lifting your margins can be complex, but RightWay's Business Partners are all highly experienced at supporting Kiwi businesses to do this and optimise many other parts of their operations. If you want to explore ways to improve your business, we’d love to have an initial chat with you. Learn more about our business advice services here.
Get help running your business
We also offer bookkeeping and payroll and of course accounting services to our clients. You don’t have to hire for these functions internally - simply chat to us about your needs and we can help build a plan that works for you. It might free up time for you to focus on growing your business and doing the work you love.