How to Improve Your Company’s Profitability
November 30th 2021
Although many business owners focus on sales as the most important metric of success, profitability, or how much you have left after you pay all your bills, is actually a much better measure of how well you’re doing. Profits are what allow you to grow and expand. They also determine whether you can afford to stay in business.
So, what, exactly, can you do to increase profitability in your business?
There are really two basic ways to boost profits: 1) Increase sales while holding costs steady or 2) Reduce costs associated with those sales.
Fortunately, there are a number of steps you can take on either front to increase your profits.
Driving up the amount of top line revenue your company generates is one approach to increasing profitability. Some ways to do this include:
Increase the value of each sale. It’s always easier to sell more to your existing customers than to go out and find new customers. So, one way to boost profits is to get your current customer base to buy more from you. That could be by raising your prices, for example, or by giving them reason to buy a wider variety of products and services. If you own a beauty salon, for example, you might persuade your customers to buy their hair products from you, on top of the cut and style they normally pay you for. The goal is to increase the average amount each customer spends with you.
Increase the volume of sales. Another approach is to get your customers to buy more frequently from you. The average sale remains the same, but you receive more payments than you usually do. You could do that by giving them an incentive to come in more often. Such as if you run a restaurant, you might give diners a reason to come back more than the typical once a month they usually do. Or if you run a doggy daycare, you might offer a temporary discount for bringing dogs in more than, say, once a week—to get clients in the habit of dropping their dogs off more frequently.
Increase your service area. Even without increasing costs or selling more to your existing clients, you can increase your potential market by expanding your geographic service area. That might entail announcing that you deliver to new zip codes, or by advertising in media that serve a broader market. The key is spreading the word that customers outside your current territory can now easily buy from you. One step you can take is creating a website to serve customers nationwide, or even globally. Furniture retailer IKEA used to only sell through its retail stores, making it difficult for customers who weren’t local to buy from the company. Creating a website and accepting online orders has greatly expanded its customer base. You can do the same.
Create new products or services. Another way to convince customers to spend their money with you is to give them other products and services to acquire. You may have customers who rely on you for one or two types of services, but who would gladly buy more if you offered it. For example, a restaurant could add more dessert offerings, a consultant could add an annual evaluation or assessment to track progress, and a personal trainer could begin to sell apparel or vitamins alongside their weekly workout sessions. Keep in mind that the products or services you add to your offerings don’t have to be things you personally create; you could explore affiliate relationships, where you sell products others have created in exchange for a small commission.
The converse of increasing the topline revenue is looking at how to reduce cash outflow. Some tactics toward that end are to:
Negotiate with suppliers. Reducing the cost of your products and services begins with looking at what you’re paying your suppliers. Can you find a way to reduce your cost of goods sold by buying in larger quantities, for example? Can you negotiate for your supplier to pay freight costs? Or can you find a supplier who is closer to your operations or less expensive? Explore with your suppliers what kind of discounts they might offer you, or strategies they might recommend to drive down your costs.
Delegate to lower-cost suppliers. Sometimes it’s possible to find suppliers to take on the responsibility for managing parts of your business and that cost less than an employee’s salary. For example, using an outside bookkeeper might be less expensive than adding a full-time staffer. Or retaining a social media manager, content creator, or prototype designer on a contract basis, per project, might turn out to be less expensive than the ongoing expense of an employee, especially if there isn’t 40 hours of work to be done each and every week.
Reduce direct costs. Sometimes the problem with expenses has to do with basic overhead, such as what you’re paying for office or warehouse space, what you’re spending on utilities, or on employee salaries. Could you save money by moving? By reducing the hours you’re open (without significantly impacting sales)? By installing solar panels to generate electricity? Reducing what you must pay each month, separate from anything related to production, can dramatically impact your profitability.
Improve productivity. Helping your employees do more in less time is another way to reduce indirect costs associated with serving customers. Offering training, for example, is a great way to help staff members learn how to complete tasks in less time, or with fewer errors, which can also drive up costs. In some cases, you may need to invest in tools and technology to enable productivity improvements, so confirm that the long-term benefit will more than pay for what you’re spending. Automating some tasks, for example, is another strategy for productivity improvements.
Look at both sides of the balance sheet—meaning cash coming in and going out—for clues to how you can increase your company’s profitability.