How to increase profit without increasing price.
This is something that every business owner is interested in, right?
I think every business owner wants higher profits. Higher profits – and higher sales – mean that more money is coming into the business. This money can then be used to grow the business.
A small business should not lower prices
It is true that when you reduce prices, you attract customers. But you should also know that this is not a desirable strategy because it reduces your profits.
Lowering your price can help to increase sales, yes, but in the longer term, it will hurt your business. Cost cutting is a good strategy for companies like Amazon because they have huge financial reserves.
It is not a good strategy for small businesses.
How to increase profit without increasing price?
1. Reduce the cost of obtaining supplies
Do you have contracts with your suppliers? Do those contracts include tiered pricing or volume pricing? Having agreements with your suppliers, even the small suppliers, can help to reduce the cost of getting supplies. This will then reduce your business expenses and increase your profit.
What is tiered pricing?
Tiered pricing is when you pay different prices depending on how many products you buy. For example: Supplier A uses tiered pricing as follows:
- Tier 1: 1-100 products at a price of €7 per product
- Tier 2: 101-200 products at a price of €6 per product
- Tier 3: 201 products and above at a price of €5 per product
You buy 400 products. This is what you will pay:
- Tier 1: 100 products x €7 = €700
- Tier 2: 100 products x €6 = €600
- Tier 3: 200 products x €5 = €1000
- Total price: €2300
The main advantage of tiered pricing is that it gives customers an incentive to buy more products so that they can get the lowest price. The main disadvantage is that it is easy to make mistakes when you are calculating the full price. It can also confuse customers.
What is volume pricing?
Volume pricing is similar to tiered pricing because you also get a discount if you buy more products. However, volume pricing will give you the discount on the entire purchase. This is the kind of discount that most of us are familiar with.
If we take the same example from above, in volume pricing, you will pay €5 for the total number of products (400). Meaning that your total price is €2000.
The main advantage of volume pricing is that it is easy to understand because the total price is easy to calculate. However, unless you are able to buy enough products to get the full discount, volume pricing can be expensive.
My advice is to review your purchases from suppliers and then determine what kind of pricing you should negotiate with each supplier.
2. Evaluate your suppliers
When it comes to knowing how to increase profit without increasing price, supplier evaluation isn’t used often enough.
When was the last time you evaluated your suppliers, to compare prices and contracts? If you have been using the same supplier for many years, there may be another vendor who is cheaper. Or, you can use the duration of the relationship to negotiate a cheaper price with your current supplier.
I started my career at a procurement consultancy. Through supplier evaluations, we were able to generate up to 20% savings on procurement for our clients. We knew that most of the time, about 20% of your suppliers will supply about 80% of what you need. This is called the Pareto Principle or the 80/20 Rule.
So, you only need to add those suppliers that are delivering additional products and keep a few suppliers as backup. This will allow you to reduce the number of suppliers that you have. It will also allow you to increase the number of items you buy from one supplier and negotiate better rates.
3. Cut production costs to increase profit without increasing price
As a business owner, you are always looking for ways to reduce the cost of producing your product. In addition to having agreements with your suppliers, these are some ideas to consider:
- Consider downsizing your office or production space. Or negotiate with your landlord or landlady to reduce the rent, maybe in exchange for free products.
- Consider allowing another business owner – but not a competitor – to use part of your space and charge them a small amount. If you are a retailer, maybe bring in a graphic designer. The income will help to reduce your rent expense.
- Look for ways to use the leftover materials from your production to create new products. Is it possible to create smaller sizes of the product?
4. Streamline your production process
Do you know where your production process is lacking efficiency? Try to track the operational efficiency of your business so that you can maximise use of resources and reduce waste.
One way to do this is to closely observe the production process and those that are working on it. Are there activities that are being repeated unnecessarily (redundant activities)? Or are there transitions in the production process that can be carried out more efficiently?
Having a more efficient production process will also help to reduce your procurement cost, reduce the amount of inventory that you need to hold and also reduce the amount of warehouse space that you need for storage.
5. Streamline your business processes
The same approach that you used to streamline your production process can also be used to streamline your business processes.
Closely observe the various processes in your business. Focus on marketing & sales, accounting & finance, customer service and human resource management. Are there areas that can be improved?
If you truly want to streamline your business processes, you should also consider documenting your processes.
Document each step of the process and add the name of the person who is responsible for each step. Then, whenever you hire somebody to work for you, you can use this document to speed up the time they need to understand your business. It also serves to clarify to current employees what they are supposed to do.
6. Remove activities that do not add value
Which of the activities in your business are taking up time but not adding any value? For production companies, the following activities do not add value to your business. In fact, they may reduce your business growth potential and your profits.
- Waiting (idle) time
- Unnecessary or excess transportation
- Handling of products
- Holding too much inventory
- Overprocessing
- Overproduction
- Defects
Some of these activities, like waiting or holding too much inventory, also apply to retail businesses and service providers. If you can remove or reduce these non-value-adding activities, you will start to see a positive impact on growth and profits.
7. Reduce your business expenses
Business owners should always have a good overview of all their business expenses. Once you have clarity about your expenses, start looking for ways to reduce them.
Review my blog post about expenses to get some ideas of what to do. And in addition to the advice in this post, don’t forget to look at your employees.
Can your employees take on some additional responsibilities instead of paying an outsider to do the work? If there are days that business is very slow, can you reduce your opening hours to lower your payroll? If yes, you can use this time to work on your business growth strategy or to generate more sales, or even to boost your online marketing.
8. Maximize your employees’ skills
Also pay attention to the kind of work your staff is doing. Are you making the best use of their skills and experience? Or are you letting expensive staff spend time doing work another person could do at less cost?
For example: do you have salespersons spending huge amounts of time filling out forms in the office? Can this work be done by someone else so that you can free the salespersons to focus on selling? Do you have staff that are sitting around wasting time because they have nothing to do? Is it possible for you to allow them to follow an online course that will teach them skills that will benefit your business?
9. Offer value instead of pay raises to employees
Employees always want higher pay, but there are other ways to compensate them. Instead of giving a pay raise, consider other things that add value.
- Is it possible for staff to have flexible work hours or more freedom to do their work?
- Can you offer them a training or online course that will teach them skills that will also benefit your business?
- Can you hire them to do some work for the business that normally you hire a consultant to do?
These things add value for employees and allow you to achieve a win-win situation for your business. You will have better skilled employees who feel valued and your small business will also increase sales because these employees bring in more value for the business.
10. Small businesses can increase profit by collecting credit faster
When it comes to how to increase profit without increasing price, this is one of the best strategies for small businesses.
- Do you offer credit to your customers?
- What are the terms and can you adjust them in your favour?
- Do your customers pay on time or do you spend time chasing them to collect payment?
Note that if your customers are taking longer to pay you, it may also mean that they are taking longer to re-order from your business.
Because if you owe somebody money, you usually try to avoid that person.
So, your customers may actually be buying from your competitors because they don’t want to face you as long as they owe you money!
Also, if you are spending your time running behind customers, you cannot use this time to develop growth strategies for your business.
- Consider offering your customers a discount if they pay in full at the time of purchase.
- Or, if they want credit, add handling fees of 5-10%.
Try to find ways that will encourage them to pay in full. Experiment and if something does not work well for your business, try another approach.
At the end of the day, it will save time, you will see money coming in faster and you may also see customers start buying more products.
So, tell me, which of these strategies is best suited to your business?
