A business’s net
profit margin is one of the most important profitability
metrics that you should track when running a business. This
metric is helpful when it comes to answering questions like whether your
company is making money or you’re pricing your products right.
Generally, the higher
your net profit margins are, the better your business is doing. If your profit
margin exceeds that of the industry’s average, it means your company has a
competitive advantage. In other words, your business is doing well compared to
others running a similar operation as you.
With that knowledge,
it’s clear why there is a need for business owners to devise a plan to increase
your company’s net profit margins. That’s what we’re here to help you do. But
before that, let’s define what a profit margin is.
What are Net Profit
Your net profit margin,
also known as profit margin, or net profit margin ratio, is the measure of
profit your company earns from its total revenue. Companies use it to determine
how much profit they made for every dollar of revenue that comes to the
To calculate a
company’s net profit margin, use the following formula:
Profit Margin (%) = (Net Profit / Revenue) x 100
Your profit margins
show how much your company gains after each transaction. It’s the amount the
company earns after the costs such as rent, manufacturing, raw materials, and other
expenses have been taken into account. The higher your profit margins are, the
better your company is doing and the higher your company’s chances of growth.
A profit margin not only shows a company how
much profits it’s earning, but its metrics can also be used as a measure of
success. By calculating a company’s profit margin, we can assess how the
business is doing compared to competitors.
5 Strategies to Boost Your
Here are a few strategies you can use to increase your small business’ profit margins
Take Unprofitable Products off the Shelves
Do a performance review of your products and determine which ones aren’t bringing in as many profits. There’s no point continuing the production of a specific product if it’s not selling well in the first place. As much as possible, make sure that all of your products are contributing to your profits. Doing so will help you eliminate some costs and improve profitability.
Avoid product markdowns as much as possible
One of the many
killers of profit is markdowns. Markdowns happen if there is too much inventory
that needs disposing of immediately to release the money tied to the stocks. When
that happens, the business could lose the profits from those particular
As much as possible, avoid product markdowns by improving your inventory’s visibility. Keep track of the quantity of stocks coming in and out of your warehouse. It’s also essential to study the product turnover to identify slow and fast-moving products. Once you have that, you can make better decisions regarding which types of inventory to stock up on and which ones you should reduce. In turn, this will speed up product turnovers, eliminating the need to markdown your product prices.
Market to your existing customers
Did you know that
marketing to your existing customers costs way less than when you’re trying to
attract new ones? This is because current customers have already been converted,
which makes it easier to upsell and cross sell to them. It’s important to maintain
their positive experience and target their needs effectively to keep them
coming back and recommending your brand to others as well.
Creating a loyalty program for your existing customers is one effective way of encouraging them to come back or spread the word about your business to their circle. Loyalty programs could come in the form of cashback, discounts, or exclusive sales. Offering these to existing customers will increase your chances of converting them into your brand’s evangelists.
Streamline to reduce overhead costs
operations is one of the biggest drivers of business profitability. Conduct a
review of your company operations and identify areas where you can cut costs. For
example, reducing the packaging for your products. Try to look into a low-cost
alternative that you can switch into to save money and increase profitability.
You can also streamline your company operations by automating tasks. For instance, using a a CRM solution to automate sales processes could save your staff a lot of time and avoid human errors. Automating aspects of your customer service process can also speed up issue resolution and reveal patterns that inform better services going forward. Marketing teams can use automation to time promotions based on customer engagement, targeting customers that are more likely to purchase based on their recent actions.
Consider increasing your prices
If you’re consistently
delivering high-quality products, excellent customer service, and attracting
new customers but are still not seeing an increase in your net profit margins,
you might want to look at your product pricing next. Have you increased your
prices the past few months or years? If not, then it might be worth looking
Many businesses may
think twice about increasing their prices because of the prospect of losing
loyal customers. However, it’s sometimes necessary. It’s worth noting that costs
increase with inflation. If your business isn’t regularly evaluating your
pricing strategy, you could end up losing money in the long-run. As long as you
continue delivering high-quality products and keeping your customer-base happy,
a slight increase in your pricing is less likely to result in loss of customers
You don’t have to go
through drastic changes to increase your company’s net profit. Even simple
things like the options listed above can do wonders for your profit margin. Do
your research and get your team together to assess where your company currently
stands. Identify, plan, and execute the next steps to take your business’
profit margin to the next level by the next quarter.