Profit margin measures how much profit a company makes on every dollar of sales. It’s an important metric because companies with higher profit margins are generally viewed as more profitable and have better business operations. A company with a high-profit margin can reinvest that money back into the business or payout dividends to shareholders.
There are several ways to improve your company’s profit margin, but you need to understand why your current number is so low before improving it. Read on to learn about the four best ways to overachieve when it comes to your profit margin.
1. Measure Your Company’s Profit Margin
The first step to increasing your profit margin is to calculate it in the first place. The profit margin formula is the company’s net profit divided by the company’s total sales. You can find the net profit in the company’s income statement, and total sales are found in the company’s financial statements.
Compare your company’s profit margin against industry averages to see where you stand. If your company’s profit margin is below the industry average, you may want to focus on increasing it. For example, the average restaurant profit margin is somewhere between 3%-6%.
2. Review Your Current Costs
One way to increase your profit margin is to reduce your costs. Start by reviewing your cost of goods sold (COGS) and total other operating expenses (TOOE). Your COGS includes the cost of materials and labor to produce your company’s products.
One way to reduce your COGS is to find cheaper suppliers. You can find suppliers that offer the same quality materials but at lower prices. Use online marketplaces such as Alibaba or find local suppliers at trade shows to find suppliers. Another way to reduce COGS is to find better deals on your materials. Reducing TOOE is to centralize your operations or find lower rent. You can also try to negotiate with your suppliers for lower shipping costs.
3. Use Data to Increase Customer Value
Another way to increase your profit margin is to increase the value of the product or service you’re offering to customers. This can reduce the number of customers who return products and increase the prices you charge for your goods.
One way to increase the value of your products is to add new features. For example, if you sell a fitness tracker, you can include ways to track nutrition or sleep. Another way to increase the value of your products is to improve the quality. This could involve improving the design or improving the materials used in the production process.
One way to increase the value of your services is to add new features to your benefit. For example, if you provide web design services, you can add SEO (search engine optimization) to your services. Another way to increase the value of your service is to improve the quality of your service.
4. Be Realistic About Setting Targets
Finally, when you’re setting profit margin targets, be realistic. When you set overly ambitious targets, they’re more likely to fail. This can lead to a lower profit margin since you’ll have to compensate with lower wholesale prices.
One way to make sure your profit margin targets are realistic is to use bottom-up forecasting. Bottom-up forecasting works by estimating the demand for each product or service. You can use SMART (specific, measurable, attainable, results-oriented, and time-related) goals to create realistic profit margin targets.
Profit margin is an important metric that can be seen as an indicator of your company’s profitability. There are several ways to increase your company’s profit margin, but you need to understand why your current number is so low before figuring out how to improve it. Start by measuring your company’s current profit margin, reviewing current costs, using data to increase customer value, and being realistic about setting targets.