How to Improve Profit Margin in Any Retail Business
Are you looking for ways how to improve profit margin? If so, you’re in the right place. In this comprehensive guide, we’ll show you how to increase your average order value, reduce waste, and more.
We know that running a business can be tough, but we also know that there are plenty of ways to improve your bottom line. So if you’re ready to learn how to improve profit margin, let’s get started!
How to Improve Profit Margin
To increase your profit margin, you first need to know your overall gross profit percentage. Don’t just estimate your inventory or work from your previous annual financials, as these figures may be out of date.
To calculate gross profit margin, divide your gross profit by your net sales. Then, analyze your gross margins over different business divisions, product categories, suppliers, or customer categories.
This will allow you to identify which products or services are selling at a loss or have low margins so that you can focus on the more profitable items.
In your accounting system, prepare the accounts for the last week of December. If you use inventory management in MYOB, there is no need to do a stock take.
Ask your CPA for some industry benchmarks. How does your accounting practice compare?
Here are some ways you can increase your sales.
1. Review Your Prices
Do you offer the same service to all your customers? If so, why?
Some customers are more willing to pay higher prices, especially if they aren’t the ones footing the bill, such as government agencies or large corporations.
Have you increased your prices to match supplier price rises and kept up with the competition? If not, now would be a good time to do so.
2. Increase Your Prices
Yes, I understand that it can be difficult to increase prices. However, as business owners, we are often more worried about price than our customers. Additionally, our overheads are constantly increasing.
If you increase your prices by 10 percent and your margin is 50 percent, you can lose 17 percent of your customers and not be any worse off.
3. Stop Discounting and Protect Your Profit
Discounting can hurt businesses by destroying margins. Businesses should be aware of this when setting prices and consider other options to attract customers.
If you want to maintain the same level of sales, you’ll need to discount your prices by 10 percent and say goodbye to your day off!
4. Don’t Compete on Price
Differentiate yourself by giving superior value, going the extra mile, or reducing all the other (non-monetary) costs of doing business with you. You can make a big difference by making it easier, faster, and more convenient for your customers.
5. Upsell and Cross-Sell
By increasing how much your customers are spending, you can boost your business growth. Find out what your customers want and create more opportunities for selling it to them.
Make sure you’re training your employees to up-sell and cross-promote. Also, make sure they know when to up-sale and when to downsale.
Make sure that your processes, systems, and workflows are set up in such a way that they maximize the chances of your callers making an additional sale.
6. Boost Your Brand
If you want to increase your prices or stop competing on price, it’s important to make sure your customers see more value in your brand than in other brands. Building a strong, recognizable brand can help you achieve this goal.
7. Negotiate with Your Suppliers
If you want to get the best possible deal on your supplies, it pays to negotiate with your suppliers. You can often get a discount by buying in bulk or streamlining your purchasing lines.
Don’t be afraid to explore other supplier options if you feel you’ve exhausted all possibilities with your current ones. It’s important to ensure you’re getting the best possible deal for your business.
8. Prevent Theft
Losing cash or merchandise is costly, whether by employees or customers who steal.
Do you have security measures in place to prevent theft, even for your employees?
9. Reduce Your Operating Costs
Each dollar that is saved is the same as earning a dollar. Examine all of your expenses closely and make sure that there are not a lot of small expenses adding up.
Check the bills from your suppliers thoroughly. After a while, you will develop a sense of when something is not right.
You may be surprised to find that you have been overcharged for goods or services that you have not received, or billed at the wrong prices. Review your supplier bills carefully to catch any discrepancies.
Review your staff to see if there are any areas where responsibilities overlap or if there are any tasks that can be streamlined, consolidated or automated.
To minimize waste, inspect every purchase line by line. Where possible, minimize supply.
10. Invest in Inventory Management
An inventory system is key to keeping track of your stock and ensuring that you have the necessary products on hand. By using an inventory system, you can free up working capital, reduce theft and stock obsolescence, and keep track of your product costs.
Making the most of what you sell is all about getting the most you can out of what you already do. As marketing expert, Jay Abraham, says: “get as much out of all you have!”.
If you want to keep track of your inventory, see what’s selling, and reorder before you sell out, an inventory management module can help. This module makes it easy to see what you have in stock, so you can make sure you always have enough on hand.
How to Calculate Profit Margin
To find your operating profit, take your business’ total income and subtract your cost of sales, operating expenses, and depreciation and amortization. Once you have your profit, just divide it by your revenue to get your profit margin.
1. Calculate the cost of goods sold (COGS)
The costs of creating the goods you sell are the direct costs involved in making those products such as raw materials, direct labor, and any supplies and materials that go into making them. Overhead costs for the factory, shipping costs, and any costs associated with distributing the products are also included.
This does not include indirect expenses such as distribution and sales force costs.
The costs of sales are the expenses you incur when selling a product.
2. Calculate general overhead expenses
All businesses have operating costs, also known as SG&A, which cover the general costs of running a business.
Examples of common business costs include rent for office space, utility bills, and contractor fees.
3. Calculate R&D and fixed assets
Many companies spend a considerable amount of money on R&D. That cost is deducted from their total revenue.
Companies typically have to amortize or depreciate their fixed assets, which means taking out appropriate allowances from revenue.
4. Calculate Operating Income and Profit Margin
To calculate your operating income, simply subtract your total operating expenses from your total revenue. From there, you can determine your operating margin by dividing your operating income by your total revenue.
Operating profit is what remains of revenue after all operating expenses have been paid. The equation is net income minus all costs.
Operating income: $50,000 – ($20,000 + $10,000) = $20,000.
Fashion XYZ had revenue of $50,000 with a cost of goods sold at $15,000 and operating expenses amounting to $10,000. This gives the company an operating income of $20,000.
Fashion XYZ’s operating income is $0.40 for every $1 in sales. This means that its profit margin is 40%.
8 Ways to Improve Profit Margin
1. Reduce the cost of goods
Working with vendors to lower costs is one way to reduce overhead. If you can get a discount, bulk rate, or other savings, it can save your business money. Packaging your product is another cost to consider. A cheaper package can lower the overall cost of your product. If you can reduce your costs, you can increase your profit margins without raising prices. This will lead to increased income for your business.
2. Improve inventory management
It’s important to always have an accurate inventory count and to keep tabs on how quickly it sells. Regular store checks can be conducted by inspecting merchandise, displays, and shelves. A stock take at the end of each workday can be conducted by staff, which will help identify any broken or unsold items.
Having good inventory control helps you make better purchasing decisions, which can help you increase sales, reduce markdowns, and free up cash.
3. Boost staff productivity
According to research, 20% of employee productivity is lost due to “organizational drag” – the processes and structures that take up time.
To ensure that your stores don’t slow down your customers, you should evaluate all of your current procedures.
It’s important to have procedures and processes in place that can be carried out by your team even if you’re not available. That way, you can be confident that your business will continue running smoothly even if something unexpected happens.
4. Automate specific tasks in your business
You can save time and money by streamlining your processes. You can do this by simplifying your workflow. Take a look at all the tasks you and your staff do daily, and see if any of them can be automated.
Some activities are taking up more time than necessary. For example, having to manually enter data from paper into a spreadsheet is quite tedious and time-consuming. Additionally, following up on issues through various chat groups can be cumbersome. Luckily, some solutions can automate these tasks for you, making your life much easier. By automating these tasks, you can save yourself a lot of time and energy that can be better spent elsewhere.
5. Increase average order value
Increase your profit by suggesting additional purchases to customers who have already made a purchase.
Products that are commonly bought together are recommended to the customer on the product page. If the customer has already committed to purchasing a product, then other relevant items are recommended to them on the page.
Placing your highest profit items in your shop’s most prominent location, such as the first page of your e-commerce site, can help increase the average value of each sale.
If you want to maximize the average value of each sale, place popular products near your checkout area. Also, offer customers recommendations before they complete their purchase.
6. Retention, retention, retention
Make sure your prices are competitive, your products are high quality, and you provide great customer service.
Maybe you can do a better job of communicating the benefits of the product or giving them a personal offer.
Keeping in touch with your customers and providing them with great service is a great way to maintain a good relationship with them. It also saves you money in the long run because you won’t have to spend as much on acquiring new customers.
7. Identify and reduce waste
Take a look at your processes and identify any areas where you are wasting materials. Also, see if there are any ways you could streamline your process to save time.
Eliminating wasteful practices from your business can help you save money and make more money.
Lean manufacturing is a method of manufacturing that aims to reduce waste. The eight types of waste that are targeted are transportation, inventory, motion, delay, overproduction, defect, rework, and waste of human potential. The concept of lean manufacturing can be applied to business operations in general.
8. Minimize Downtime
Downtime is a result of mishandling OWN TIME.
- Over-production or making more products than needed
- Wait for unplanned downtime, absence, or imbalanced workload
- Not utilizing talent to its fullest potential.
- Transportation waste such as excessive shipping costs and wasted time moving inventory
- Inventory surplus (excess or obsolete items sitting idle in your warehouse)
- Movement Waste (unnecessarily moving people and a poor in-store experience
- Excessive or unnecessary processes
When it comes to reducing waste in your operations, it’s important to take a close look at each individual component. This will help you identify any areas where wastes are present so that you can find ways to eliminate them. By taking this approach, you can streamline your operations and improve your overall efficiency.
If you want to know how to improve profit margin, there are a few key things you can do. First, focus on increasing your average order value. Second, work on reducing waste in your business. And third, make sure you’re constantly monitoring your expenses and income so that you can identify any areas where you can save money. By following these tips, you’ll be well on your way to improving your bottom line!