Business owners are always interested in how to increase profits.
Knowing how to increase profits in a small business also gives you
insights into how to improve your business and shows you ways to
increase business productivity.
If you do an online search, you will find many articles containing a variety of strategies. All these strategies can be summarised as the only 3 key ways to increase profits for a small business:
- Increase sales
- Increase prices
- Reduce costs
Profitability is determined by two main factors:
- Tthe price you charge
- Your expenses
Your business is profitable when you sell products at a price that is higher than the money that it costs you to produce them. These costs include time, money, and resources.
One reason why businesses struggle to be profitable is because their gross profit margins are not high enough to cover all their expenses. Sometimes, businesses are not even aware of all their expenses.
Increase profit by increasing your sales
So, how to increase sales for a small business?
You increase sales by selling more. There are three ways to achieve this:
1. Convince your existing customers to buy more products or services
Easy ways to do so include offering impulse buys at the checkout counter, using promotions (offline and on social media, and creating bundles or packages that allow you to cross-sell and upsell to your customers. Be careful when using promotions!
Make sure that the lower price will still give you enough profit margin to cover your expenses. If not, you will start losing money.
2. Convince your existing customers to buy more often
When you look at what customers buy, you can distinguish between regular purchases and irregular purchases. Regular purchases are those things that your customer always buys.
For example, if you are a bakery, your customer may come in once a week and always buy a few loaves of bread. An example of an irregular purchase by this customer could be a wedding cake.
Irregular purchases are mostly determined by two things:
- events in your customer’s life. These include graduation, marriage, new job, new house, or the birth of a child
- seasonal dates. These include national holidays, Christmas, Valentine’s Day, birthdays, etc.
If you want to convince your customer to buy more often, you need to make the right offer to the right customer at the right time and at the right price.
For you as a business owner, this means that you need to get to know your customer. Study your customers’ behaviour to understand why they make certain choices. This knowledge will help you create promotions that encourage them to buy more frequently.
3. Get new customers
Getting new customers is another way to increase your revenue.
But don’t try to get just any kind of new customer. To really see improvements in your business, focus on attracting more customers that bring in the highest profits.
Every business owner should know who their most profitable customers are because they are the ones who bring in the highest profits. They also make it easy for you to run your business.
If you keep sales records, it is very easy to identify your most profitable customers. And after studying them, you will also know why they buy from you instead of from your competitors. You can then use this information to design a highly targeted marketing campaign to attract this particular type of customer.
By focusing your efforts on attracting and retaining these most profitable customers, you will soon see your profits increase.
Increase profit by increasing your prices
There are many reasons why businesses decide to increase prices.
For service providers, this may be because you have gained more experience or expertise, or because the cost of living has gone up due to inflation or price increases.
Increasing your price can be achieved by increasing your rate or fee. You can also reduce the amount of time you spend providing the service. For example, a personal coach could decide to reduce the duration of a training session to 45 minutes from 60 minutes, without reducing the price.
Or, you may decide to increase the value of each sale by looking for ways to package your hours so that you collect more money for the same amount of hours.
Retailers and manufacturers can decide to use a small percentage increase across all products. This way, the increase is spread out over a large number of products and the price increase for each product can be kept low. This approach also makes a price increase less noticeable for customers, because an increase of 3 cents may not be a reason for concern.
If the price increase does not affect the entire company, but only certain goods or raw materials, retailers and manufacturers can also decide to increase the prices of specific products. This approach will let them keep the prices of other products unchanged.
Many business owners are afraid of increasing prices because they fear that their customers will abandon them.
This is not likely to happen if:
- your business is selling something that your customers really want
- your business can distinguish itself clearly from the competition, and
- you can explain clearly why your prices need to be increased
However, if your business is not yet able to do so, or if you operate in a sector that is highly competitive, the following strategy may be more suitable for you.
Increase profit by reducing costs
Cost reduction is one of the easiest strategies that businesses can use to increase profitability.
This is because it is something that you are fully in control of. Also, it will not affect your customers in the way that increasing prices would.
Many businesses have costs that are not 100% necessary to run the business.
Take some time to analyse each of the expenses in your business. For each expense, ask yourself if your business could continue operating without it. If the answer is yes, cut that cost out.
If it is a must-have for your business, take some time to find out whether there is a way to get it cheaper. For example, can you lease it instead of buying it? Or can you share the expense with other businesses so that your own expense is reduced?
Always focus on profitability by keeping your expenses as low as possible.
This strategy is a great way to determine where to start cutting costs. Take a look at this article for more ideas about how to cut costs and increase profits.
The challenge for many business owners is that reducing costs often means that quality is also affected. Lowering quality leads to customer dissatisfaction. Dissatisfied customers equal lower profits.
Don’t make that mistake.
Look for ways to cut costs that do not affect your quality. Or, find ways to cut costs that lead to higher quality!
In short, as a business owner focused on profitability, your primary focus cannot only be how to increase sales for your small business. Higher sales are good, but they should also lead to higher profitability.
To do that, your focus should mainly be on how to increase profits for your small business. While running your business, always try to implement one or more of the only 3 ways to increase profits.