In the hubbub of maintaining your business, improving profitability and tracking profit growth can often get left by the wayside. After all, who’s got time to strategise when there are customers clamouring for orders?
Yet, creating and maintaining healthy profit margins is vital for business growth. Research shows the average profit made by UK SMEs was £11,000 in 2020 with larger businesses – in terms of number of employees – generating a larger share of profits (annual profits of £9,000 for businesses with 0 employees compared to £250,000 for businesses with between 50-249 employees) [1].
In this article, we outline seven steps that will help you improve your profitability with expert insights from SME owners who have managed to grow their margins using some of these tactics.
How to increase profit in seven ways
- Identify the products or services with the highest gross profit margin
- Make profitability everyone’s responsibility
- Review your pricing strategy
- Audit your technology stack and workflows
- Look for value-add opportunities
- Increase conversion
- Reduce inventory
1. Identify the products or services with the highest gross profit margin
Knowing your industry’s average gross profit margin is a useful benchmark to identify the products that provide the greatest return for your business. Data shows the wholesale retail industry is the most profitable sector for UK SMEs with an average annual profit of £13,000 in 2020 [1] and an average profit margin of 52.48% in 2019 [2]. This is compared to 9.4% for UK manufacturing companies and 14.9% for companies that provide services [3].
Once you have calculated your gross profit margin and benchmarked against competitor data, decide if unprofitable products or services should be removed or reviewed in order to find areas for improvement. Using a cost reduction analysis approach helps you to target cost-cutting strategically. It involves differentiating the critical 'good costs' – those that fund business differentiators, improve the customer experience and enable you to develop new value propositions – from the non-essential 'bad costs', which are non-essential areas of spending. It is these 'bad costs' that are in need of overhaul or elimination.
Make your "good costs" work harder with your American Express® Business Gold Card, which gives you the ability to earn 1 Membership Rewards® point for every £1 you spend¹ and 10,000 extra Membership Rewards points when you spend £20,000 per quarter², all of which can be used to reinvest into your business.
2. Make profitability everyone’s responsibility
Jamie Love, CEO of multi-channel marketing company Monumental, delivered a full cost review of all products and services to the company, which involved identifying costs from office supplies expenditure to available funding and staffing.
“We approached this [cost review] in the style of a full audit of our last year’s accounts, outlining total expenditure in different cost lines as well as understanding fluctuations,” says Love.
Once costs were better understood, collaboration with teams across the business led to the development of cost-cutting exercises, which included cutting unnecessary subscriptions and consolidating technology providers that totalled a 5% decrease in yearly costs.
3. Review your pricing strategy
Consider pricing strategies such as:
- Price skimming: Setting a high price for a new product and then reducing it
- Premium pricing: Setting a higher price than your competitors, shaping your customer’s idea of value according to how you market
- Economy pricing: Usually used for large-volume products
- Price anchoring: Placing premium prices near standard options to imply good value
- Bundle pricing: Offering multiple products at a lower rate.
4. Audit your technology stack and workflows
With more than 4 in 10 UK SMEs adopting more technology since March 2020 and 94% reporting this adoption has been "for the better", ensuring financial controls are tight across the myriad of platforms available is crucial for ensuring you can grow your margins [4].
Lettings platform Mashroom has maximised its profits by reducing software subscription costs and looking for innovative and alternative providers to traditional software.
"Have a brainstorming session with business counterparts and question yourself on each external software, contractor and other providers,” says Mashroom’s CFO Alex Badalyan.
5. Look for value-add opportunities
More than a third of businesses have had to adapt to protect their profitability in the past year owing to difficult market conditions [4]. Family-owned artisanal spice company Spice Kitchen recently pivoted its offering towards direct-to-consumer with a focus on investing in its customer experience to ensure consistent profits. “This included giving away free spices and writing handwritten notes [to personalise] every order,” says Chief Spice Officer Sanjay Aggarwal. Spice Kitchen has also created partnerships with cookery schools, offering free spices to people attending courses to help attract new customers.
6. Increase conversion
Conversion rate is one of the most important metrics for measuring the effectiveness of your website. To calculate conversion rate, divide the number of conversions by the number of website visitors and times by one hundred. Once you have your benchmark, you can set about increasing your conversion rate, thereby getting more out of your existing web traffic and improving profitability.
There are lots of Conversion Rate Optimisation (CRO) techniques you can try, but it helps to start with your analytics. Study the data to identify where potential customers are dropping off, and try tweaking those pages to help visitors continue on the journey to conversion. If visitors are reaching your lead gen form but not completing it, remove any fields that are not absolutely necessary. If you have an e-commerce site where visitors are not progressing beyond the product page, try adding a chatbot to answer any questions they may have.
7. Reduce inventory
Consider using a technique such as the inventory management ABC analysis, which ranks the value of inventory according to their value to the business across categories including demand, cost and risk. This entails dividing your inventory into three categories: 'A items', which have a high value and should have with very tight controls and accurate records, 'B items', which have a medium value with less tight controls and good records, and 'C items', which have low value and need the simplest controls possible with minimal records. Categorising inventory in this way will help you ensure you can strategically manage critical stock levels to maintain and grow your profit margins.
Whether you’re doing hand-written notes to improve the customer experience or implementing a cost review to reduce spend, when you start to put your plans to increase profit margins in place, we can provide assistance. The American Express Business Gold Card gives you the flexibility to test profitability tactics by ensuring cash stays in your business for longer, with its payment period of up to 54 days on purchases³.
- Membership Rewards points are earned on every full £1 spent and charged, per transaction. Terms and conditions apply.
- Terms and conditions apply. Click here for more details on the bonus Membership Rewards points.
- The maximum payment period on purchases is 54 calendar days on Gold & Platinum Business Charge Cards and 42 calendar days on the Basic Business Charge Card, it is obtained only if you spend on the first day of the new statement period and repay the balance in full on the due date.
- If you'd prefer a Card with no annual fee, rewards or other features, an alternative option is available – the Business Basic Card.
Sources
[2] Vend: How to increase your profit margins: 11 strategies to improve profitability
[3] Office of National Statistics: Profitability of UK companies: October to December 2019
[4] Vimcar: The Digitalisation Of Britain’s SMEs, Through COVID & Beyond
