Profitability refers to a company’s ability to earn a profit, and is in a way, a measurement of a company’s success or failure. Every company wants to be profitable, and the ones that are will always want to improve upon their profitability. However, achieving and maintaining high profitability ratios are one of the biggest challenges that many entrepreneurs face.
So, in this article, we’ve highlighted five of the most effective strategies that small business owners can implement in order to improve their company’s profitability:
Finding the best price for your products can be tricky and is something that you should continually monitor as you operate your business. Factors such as inflation, a change in demand or new competition can often affect the prices of goods, and your retail prices will need to reflect that.
With that being said, sometimes even a small price increase can make a significant difference in your profitability. You could try price testing to see how an increase is received by your customers. If you are going to raise your prices, always be cognizant of how much your competitors are offering for the same or a similar type of product. Pricing your products too much higher than your competitors’ could very well result in a loss of profit. (and that would be the opposite of our goal!)
Cutting down on your business expenses can drive profitability from the opposite end. Since profit is revenue generated beyond your expenses, lowering your expenses would also help to increase profit. Business owners can usually find minor processes in their company’s operations that they can cut down on. For instance, integrating automation processes can reduce the need for certain hires, which would cut down on payroll costs. It may require a substantial cost upfront, but will yield more savings over time in the long run.
Here are some other areas where you should consider cutting costs:
Upselling and cross-selling are two strategies for increasing sales. When executed successfully, both can help to increase a company’s profitability.
The upselling method encourages your clients or customers to pay for an upgraded or premium version of a product or service that they are already interested in. For instance, when Apple launched the iPhone 11, they also rolled out the iPhone 11 Pro and the iPhone 11 Pro Max, both of which had added features for an increased cost. Customers that are interested in the standard model of a product may be inclined to spend a couple hundred dollars more for an upgraded version with more features.
Cross-selling is the process of marketing two products as complementary to one another as a means to encourage customers to buy one when they purchase the other. Like when you buy paint from the hardware store, the staff will likely encourage you to buy paint brushes and/or rollers along with it.
Marketing to your existing customers costs less than marketing to gain new ones. If you already have a loyal customer base, focus the bulk of your marketing efforts towards them. They are already fans of your brand, so the more you invest in their continued satisfaction, the more likely they will be to recommend your company to their friends and family. Word of mouth is still one of the most effective means of marketing, as people tend to trust their peers more than advertisements.
There are many ways to do this. You can create a rewards program for your top shoppers to encourage customer loyalty or offer special discounts given when someone refers a new customer to your company. Don’t shy away from being creative, the possibilities are endless!
Improper management of inventory can have the most damaging effect on your business’ profitability. Both a product surplus and a product shortage can lead to profit losses. Excess inventory ties up a lot of cash because you’ve already purchased the goods but you’re not selling them to get the return on your investment. This could ultimately result in you having to discount them or throw them away all together, which would eat into your profitability. It can also be costly to store these excess products. A product shortage, on the other hand, can lead to customer disappointment and loss of potential sales.
To avoid either of these scenarios, look into upgrading or automating your current inventory management system (if need be). Many tools are available to improve visibility of your inventory levels so you won’t end up having excess or deficit in your stocks.
Savvy business owners should always be looking for ways to improve their company’s profitability. You may need to get creative to find new ways to increase your incoming revenue, or to minimize your outgoing costs. Try different things (within reason) and see what works or what doesn’t. Reevaluate your business’ expenses every so often to determine if there are areas where you can cut costs. Think of how a single purchase can lead to a larger dollar transaction. Remember, the higher your profitability is, the more successful your company is going to be.