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The economic landscape has proven rough terrain for businesses for several years now. The fallout of the pandemic, Brexit and an ongoing conflict in Eastern Europe have impinged on logistics and raised costs in every link of business supply chains in recent years. There is, however, some light at the end of the tunnel, with SMEs projecting around 10% growth in profits in 2023 according to HSBC. Furthermore, research by Barclays in February 2023 revealed that 41% of UK SMEs were feeling optimistic about the coming year despite the economic uncertainty.
But while UK small businesses are hoping for the best, they are also planning for the worst. By taking active steps to increase profit margins in order to insulate themselves against economic risk.
In order to increase profitability, businesses need to fight a battle on two fronts, increasing revenues while also driving down operating costs. Hidden costs like payment processing fees can all add up to put a dent in your business profits over time. Likewise, a lack of focus in your sales and marketing strategy can stymie your revenues and make it harder to increase your gross profit margin.
Here, we’ll look at 7 ways to improve profitability by either increasing costs, improving revenue or implementing strategies that will do both.
1- Take steps to boost productivity
If you’re serious about improving profitability, increasing productivity should be one of your top priorities. There is a clear relationship between a company’s productivity and its profitability as low productivity involves wasting resources and limiting output.
There are a number of ways in which your business can boost its productivity and therefore improve its profitability. These include:
- Establishing a set of productivity KPIs and criteria for measuring them (software can help with this)
- Making increased use of automation in your business
- Implementing an employee recognition or reward scheme to motivate and inspire your team
- Offering team members more flexible working patterns so that they can do their jobs when they are at their most personally productive
- Implementing a profit-sharing system to motivate staff to manage their own productivity and measure its impact on growing profits
2- Use a loyalty scheme to keep customers coming back
Businesses know that reliable growth comes from investing in both customer acquisition and retention. Failure to get the balance right, however, and businesses can harm their profitability.
Depending on whom you ask, it can cost anywhere between five and ten times more to acquire new customers than it costs to retain the ones that you already have. Therefore, businesses that want to increase profitability at the lowest cost should prioritise customer retention.
A loyalty scheme can be an excellent way to do this. But in order to be effective, a loyalty scheme needs to offer customers more of what they want and incentivise them to keep coming back. In the smartphone age, rewards apps can be a great way to gamify your rewards scheme, enabling customers to see their progress as they acquire points that will lead to prizes, exclusive discounts or money off their next order.
3- Make your operations more energy-efficient
The sharp increase in wholesale gas costs has had a profound increase in both domestic and business energy rates. This has resulted in a sharp increase in operating costs for businesses of all shapes and sizes. In order to improve operating profits, businesses need to address their energy costs.
Of course, finding the best value energy deal is extremely important but this alone may not be enough to meaningfully reduce overheads and increase profit margins. Businesses should also take steps to improve energy efficiency and reduce consumption. From offices to restaurants and retail outlets, businesses of all natures can improve energy efficiency by:
- Switching off equipment out of hours
- Only turning equipment on when needed
- Setting thermostats to the optimal temperature (around 20˚C for offices, 6˚C for warehouses). Each additional degree can add up to 8% to your heating bill.
- Ensuring that radiators are not obstructed by displays or furniture
- Investing in more green energy infrastructure. Your business may be eligible for government grants to help offset the cost.
4- Use upselling and cross-selling to increase revenue
A great way to increase profits is to focus on increasing average order value (AOV). In other words, getting your customers to spend more every time they use your business.
Upselling can be a very effective way to do this, encouraging customers to purchase a premium version of a product they are considering that will bring them substantially more benefit for a slightly higher cost.
Cross-selling is another effective way of improving AOV at a negligible cost to the business. Product bundles are a great example of cross-selling for retailers, while meal deals and set menus are a perfect cross-selling option for restaurants.
5- Renegotiate terms with suppliers
Small increases in costs can add up to a substantial amount when they are encountered across your supply chain. As such, if you have a good relationship with suppliers, it may be worth trying to renegotiate terms. Some may be able to offer you a discount if you are prepared to order in slightly higher volumes. Alternatively, even if they cannot reduce the cost of the items you buy from them, they may be willing to offer more flexibility in terms of payment. This could ease cash flow and prevent borrowing that could later damage your business’ profitability.
6- Re-evaluate the profitability of your product range
Whatever the nature of your business, not every product you sell is likely to carry the same product margin, nor does it sell in the same volume. Products or services that sell in high volumes and carry high margins are your superstars and staff should be trained to push these through upselling where possible. Those that have high-profit margins but low sales volumes can benefit from more active promotions, adding to cross-selling bundles or putting on special offers at a negligible cost to their margin.
If a product scores poorly in sales volume and profit margin, it may be worth withdrawing, at least temporarily. Meanwhile, offerings that have high sales volumes but low margins can help to increase profitability with a slight increase in their pricing.
7- Don’t be afraid to raise your prices
Finally, business leaders may feel nervous about revisiting their pricing strategies. After all, they want to remain competitive and have no desire to alienate their customers. But in the current economic climate, there’s a good chance that your competitors have already increased their prices in order to prevent the erosion of their profit margins.
There’s no shame in raising your prices, as long as you go about it the right way. That means:
- Ensuring that prices are fair, proportionate and reasonable
- Informing customers well in advance of implementing any price increases
- Being transparent in explaining why you have raised your prices
- Reiterating your commitment to maintaining the quality your customers have come to expect
