Last week we featured a case study from our one hour brainstorming sessions about a business that increased it’s profits by creating an upsell. This recieved a great deal of comments and page views. So, in this post we’ll take a more indepth look at profit margins.

We all know how Profit Margins are crucial to  your businesses profitability. So, it follows that if you’ve got a business (either web based or bricks and mortar) which is growing fast it counts for nothing in the long term if you’re not making a profit from it.

So, not only is it critically important that you know you’re overall margins, you must know the margin for each product or service you sell or provide.

The reason this is is important? Is  because you want to be sure you are only promoting and selling your highest margin products and services whenever you can.

For instance, I will shortly be pulling off my front page my recommended books from Amazon, it’s not that I don’t still recommend them, I do, but at 4-5% commission from every book sold through my affiliate link it’s hardly going to make a fortune. Far better to feature my own products where I keep 100% of the sales proceeds.

The products or services which are the most profitable will be game changes to your business.  Because these are the products and services are that not only cover your operating costs they allow you to invest in your business (or fund that big TV!)

Two ways to increase margins

There are two main ways you can improve the Profit Margins in your business:

1. increase your prices
2. reducing your costs and expenses

Increasing prices

In the current economic climate many business owners will shy of increasing prices, especially with the UK Government announcing that (sales tax) will rise from 17.5% to 20% from January 1st, as it’s possible you may kill off any growth, but if you have done the hard work in creating a Unique Selling Proposition and differentiated yourself from the competition, then increasing your prices may be a good option.

Regular commentator on this site, Joshua Black, provides a software tool for generating Unique Selling Propositions which could be well worth checking out – check out his The Underdog Millionaire blog for more details.

Studies have shown that customers are not just doing business with you from price alone, (customer service, image, support/after sales etc).  Take for example the new iPhone which launched in the UK on 24th June. On 25th June a friend of mine qued for 3 hours to get his new iPhone 4. He wasn’t queuing for the cheapest phone on the market. If he and the other people queuing wanted a cheaper phone, they’d have got a Nokia.

Yet many business owners focus on price as being the most important factor. This fear of the unknown is what keeps business owners from taking the bold step to increase their margins through a price increase.

If you increase your prices, maybe you could soften the blow by bundling something that costs you little yet is perceived as a high value add by the buyer. For example a teleseminar or webinar.

Reducing costs

On the face of it, cutting costs is often seen as being easier, but only if you cut the right costs. You want to cut the costs of things that drive your costs not drive the value of your product. Especially when you are trying to grow your business.

Reducing and eliminating waste is always good a good option (for example stock holding times), but often expense cutting comes in the form of eliminating services or reducing support or sales staff.

A lot of UK businesses outsourced call centres overseas, now some UK businesses are using it as a point of difference and advertising UK based call centres.  The last thing you want to do is to become a “me too” business simply because of your efforts to cut costs.

When I worked at Rolls-Royce we spent a lot of time looking at processess efficincies, often based on studies of Japanese businesses, to improve quality by eliminating rework and reduced delivery times simply by reviewing the end to end processes of producing the product.

If they can do it, so can you. When was the last time you critically evaluated your business operations with an eye towards gaining efficiencies and reducing unnecessary steps on your process?

This is such a powerful way to reduce your costs –whilst at the same time improving your productivity and customer satisfaction.

The challenge for every business owner to face is to first know your margins, then to steadily go about improving them on a regular basis.

So, what do you think?