Creating healthy profit margins to better your bottom line

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This article is Part 5 in Dr Greg Chapman’s ‘Five Profit Drivers’ Series. Follow these monthly articles for a comprehensive guide to driving profits with expert marketing advice for your small business.

Last month, Dr Chapman described the fourth profit driver – increasing the number of times a customer buys

The fifth of the Five Profit Drivers is – Increasing the Gross Profit per Sale

The easiest way to increase your Gross Profit per Sale is just to increase your prices. The beauty about this strategy is that the increase in price goes straight to the bottom line. A mere 10% increase in prices will double the net profit of most businesses.

Of course the reason most businesses don’t increase their prices is because they are concerned about losing sales, and if you just increase your prices without any other marketing, you will.

So how do you increase your prices? To achieve sustainable and significant price increases, you must be able to defend the increase with your marketing which must justify the higher price. In most cases this means you will have to change at least some elements of your marketing strategy. The bigger the price rise you are seeking, the more radical the changes you must make to your marketing.

The first thing a business should do before increasing their prices is to understand their points of difference and for which buyers that delivers greatest value. By targeting buyers that appreciate the value you provide, it is far easier to increase your prices. For example, people in a hurry will be prepared to pay more for a same day dry cleaning service. The dry cleaner may also have a premium cleaning service for your most expensive clothes.

Branding is also a well known way to increase your prices. People will pay more for a branded product because of the recognition and trust factor than they will for a no-name product. In fact, branded products can become reassuringly expensive!

Having different product levels is a way of avoiding the price debate with customers. So when you have a Silver, Gold and Platinum service people will compare the prices and value at each level. The price conscious will may choose Silver (with less in the box) instead of Gold, or they may convince themselves that they really prefer the extra value of Gold. So don’t discount your price, discount your scope; with each level of service equally profitable.

You can learn more about pricing strategies, and to listen to an interview on “How to Increase Your Prices” at www.IncreaseYourPrices.com.au  

The opposite strategic direction of price increases to Increase your Gross Profit Margin, is of course, to reduce your costs. While reducing costs is more difficult without compromising your quality, there are usually opportunities, such as changing suppliers, or requesting supplier volume rebates.

Another opportunity to consider is that you may find part of your operations can be outsourced to someone who could provide cheaper service. There are a number of websites that connect businesses with low cost international freelancers.

Creating systems such as templates can reduce effort and mistakes and therefore costs. Efficiencies can also be gained with software and with equipment that increases productivity. Training can also reduce costs.

Action Plan

  1. Identify the Price Increase Strategies you will implement
  2. Decide the best cost reduction strategies
  3. Create an implementation plan and track your Gross Profit Margin increase

Dr Greg Chapman is the author of the award winning best seller, The Five Pillars of Guaranteed Business Success. Visit Empower Business Solutions to learn more about marketing your business and a free preview of his book.

Dr Greg Chapman is a business advisor and CEO of Empower Business Solutions. He is the author of the award winning book: “Married to the Business: Honey I love you but our business sucks".