We hope your Christmas was a good one, but now it's back to work for the New Year with (here's hoping) renewed intentions and impetus to improve those margins. Unfortunately there are no quick fixes, "no work, no pain" will not boost your margins. It will require major strategic changes, but if you're truly serious about becoming more profitable, then read on.
The Tasks
This article provides fifteen tasks that you could use use kick start a margin improvement initiative for 2016. Here's the list:
1. Increase your prices
This is the easiest and most obvious way to increase your margins. If you are currently earning a 15% gross margin, and you want to increase it to 25%, you will need to increase prices by 10% if you're selling the same volume as last year. Of course, it's not that plain sailing as this will alienate clients, and unless you are considerably better than your competitors, you will lose clients unwilling to pay higher rates. Think along the lines of increasing some product or service segments by 1–5%. If you manage the process well and inform your customers of this minor increase hopefully they will stick with you. However, it's also a risky business if your customers are sensitive to changes in price. Before you increase your prices, experiment to see what reaction you get.
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Start by reviewing your past price changes. Isolate the impact of each change to determine how specific customer segments reacted and how well an increase was received across product lines. Using these findings, highlight which accounts and which products are due for a price increase.
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Once you've established your targets, decide on the perfect price increase for each. If you overcharge, you risk losing customers. If you undercharge you leave money on the table. Factors such as price change responsiveness, annual spend, and loyalty come into play during this step. Test increases with your most loyal customers within each segment first. If they respond favourably, happy days! If they heavily dispute the rise your price increase needs more consideration.
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Outline why customers should accept a price increase - bring everything back to value for effective justification for the price hike. If you haven’t communicated the value points well ahead of the increase, it will be difficult to get your customers on board.
2. Keep a close eye on Price Sensitivity
A cafe that increases a cup of coffee by 5p probably won’t see any decreased demand as the increase is too small to be noticed. However, if the increase is £1 a cup, that's a different story. There will always be a threshold where customers will switch for a lower price regardless of how great you are, especially for products and services where customers have a fair idea of the cost and value they recieve.
If you do sell items that are price sensitive, keep your major products or services at competitive prices. Think about increasing margins on supplementary products or services.
3. Don't Discount
Discounting can be the death of many businesses that don’t realise how badly this destroys margins. If you discount your prices by 10%, you need a 25% increase in sales just to stand still. Or if you do have to discount, make it work for you, not against you.
4. Regularly check your prices
Keep a close eye on your prices, and those of your competitors.
5. Analyse your Clients
Focus on retaining the customers who make your company money. Why are they loyal? What are you doing differently with them and for them? Apply the lessons learned across the board and implement uncovered strategies as best practices for your team.
At the other end of the spectrum, analyse your sales transaction data to uncover the most vulnerable accounts. Get your account managers and sales reps on the case to determine what's going wrong. Is it a pricing, customer service, product quality, or competitor problem? Ensure your team members keep detailed notes and share their findings with everyone involved to minimize these issues for all customers across the board.
6. Change Your Focus
Sometimes, there's little (or nothing) that can be done to make a significant improvement in margins within the confines of your current business operations. So what's the alternative? You can change your focus. This might mean a major shift in your business. It can include entering new niche markets, expanding your range of services, or expanding into new geographic markets.
- Tailor your Unique Value Propositions (UVP). The rise of data analytics makes decoding customer needs and wants easier than ever. Start building specific unique value propositions for each customer segment. Keep differentiation in mind. The important word here is "unique". If you start sounding too much like competitors, you’ll be forced to compete on price. Build UVPs for each customer segment to create tailored offers and better profit opportunities.
- Use historical data. Using your historical sales transaction data, carefully segment your customers based on product preferences, markets, industries, purchase habits, and even price responsiveness. You will build up profiles for each that answer the following questions:
- What offers resonate with each type of customer?
- Which customers deliver the most profit? What products do these customers frequently buy?
- Which products sell well together?
- Who are your most loyal customers? Why do they keep coming back?
- Drive Better Deals With Richer Product Mix. A change in product mix accounts for almost a third of total margin change each year, but many companies choose to avoid this and instead use it as a plug due to data and measurement complexity. Learn how to isolate and analyze your product mix shift and you may see a marked margin improvement. Your product mix shift can tell you exactly:
- Which products and product lines sell well together.
- Which product combinations work best for specific customer segments.
- Which product substitutes sell best in lieu of a preferred product.
- When sales for specific product lines peak during the year and when sales reps can expect a lull.
7. Spring clean your data
One of the biggest obstacles to fast and efficient margin analysis is poor, unstructured, and disorganized data. Aim for a fresh start in 2016. Streamline your reporting, get all departments using the same metrics and report formats. The more easily everyone can read and understand their data, the quicker everyone can work together to determine how specific decisions from each team affects the company as a whole.
8. Lower the cost of supply
The other main way you can improve your margins is by lowering the cost of supply, i.e. find ways to pay less for any of the costs associated with bringing your products or services to your customers.
To achieve lower costs, consider:
- Sourcing raw materials from a more cost-effective supplier.
- Purchasing in bulk if discounts are available and it's suitable for your business.
- Importing – if your business can get similar raw materials or products from overseas at less cost, give this serious thought.
- Taking advantage of any early payment or cash payment discounts.
- Taking steps to reduce theft and wastage.
9. Focus on larger margins
Concentrate on the products or services you sell that have larger margins – by selling more of these, your business will increase profits. Train your staff to be aware of which items have the biggest margin and are therefore best to promote.
Likewise, begin to phase out goods that have low margins. If you’re selling plenty of them but not making much profit, it might be best to use that space or time for something more profitable.
Ensure these items aren’t loss leaders, meaning they’re used to get customers into your store with the expectation they’ll buy other products. This rule applies to any business, regardless if you are selling products, time, technology or primary produce.
Other options for focusing on larger margins include:
- Changing your product or service mix – so your business has more offerings with greater margins
- Promote items with the highest margins above those that have low margins.
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Practise the 80/20 rule where 80% of your profits should be coming from 20% of your goods or services that have the highest margins.
10. Target better clients
Change the customers you are targeting to ones that will spend more or who are less price resistant. They may be quite happy to pay a higher price for what you offer.
Consider only doing business with those customers that pay on time or are not looking for a discount. By not having to wait for your money you will enjoy higher margins by either paying less interest on any funding, or receiving interest on spare cash.
11. Attract new clients
Change your promotional messages to sell higher margin items, but make sure you have the calibre of staff able to sell these. You can also open new locations or target new regions that have customers willing to buy higher margin products or services.
12. Analyse your profit margins
Find out the gross profit margin on each of your products and services, and, in addition, analyse your gross margins over different business divisions, product categories, suppliers or customer categories according to your business. You will identify both low margin or loss-making items and profitable activities or products. You can then stop selling low margin lines and focus on the ones that work.
13. Prevent theft
Whether stolen by staff or customers, losing cash is very costly. Do you have anti-shoplifting or theft prevention systems in place, even for staff? Do you balance your tills? Who does your banking?
14 .Watch supplier bills
Check these personally. After a while you’ll get a “feel” for things which aren’t right. Don’t be surprised to find that you’ve been overcharged for goods or services you haven’t received or been billed at the wrong prices.
15. Get Started with Price Optimisation Software
All of this data and margin analysis might sound daunting, but with a strong software solution, you can fly through any difficult mechanics to achieve your goals. Innoware provides a solution called Price Optimiser to cover these needs.
Sources
- http://www.net-temps.com/careerdev/crossroads/print.htm?id=1894/David Searns
- http://myob.com.au/blog/10-ways-to-increase-your-profit-margins/
- http://managinginthemargins.blogspot.co.uk/
- http://www.scotiabank.com/ca/en/0,,8368,00.html
- http://www.haleymarketing.com/how-to-tips/six-ways-to-increase-margins/
- https://thekinigroup.com/blog/5-margin-improvement-levers-pull-profitable-new-year/
- The Marketing Blueprint: lessons to market and sell anything, Jules Marcoux 2015
- Economics Rules, Dani Rodrik, 2015
- How to Sell at Margins Higher than Your Competitors: winning every sale at full price, rate or fee, Lawrence L. Steinmetz and Williams T. Brooks, 2005