The past few years haven’t been easy for small business owners in the UK, and with warnings that inflation could exceed a record 22% in 2023 [1], the pressure to maintain healthy profit margins is unlikely to lift anytime soon.
“Globally, business is facing increased input costs," says Stephen W. Walker, co-founder of SME consultancy Motivation Matters. "They have to work hard to stand still, but working hard and improving the gross profit margin is even better.”
In the face of soaring costs, it's easy to assume that those businesses improving their margins are raising their prices. But that is not the only way to grow your gross profit margin. This article will explore the importance to your business of maintaining a good gross profit margin, and present four key approaches to help you to do so.
What is a gross profit margin?
A gross profit margin is a way to measure the health of a business; it describes the money left over from sales after subtracting cost of goods sold (COGS). It is helpful to express this as gross profit made for every pound of sales revenue banked. For example, a gross profit margin of 60% means that every £1 of sales provides 60p of gross profit.
The importance of improving gross profit margin
With costs – especially those tied to energy – in constant flux, it pays for business owners in all industries to grow their gross profit margin, since this can provide a financial cushion. This cushion not only ensures you can cover overheads, but allows you more financial freedom to explore ways to grow.
“In the early stages of any start-up, keeping an eye on the bottom line is key,” says Bristol-based entrepreneur Lisa Carter, who founded Discussion Box, a virtual events platform that specialises in private events connecting organisations with prospective clients. In its first year of trading in 2021, the company – which now employs 12 people – generated £1.2m, and has seen a 50% revenue growth in Q1 of its second year.
“For us to retain better talent, scale, and ultimately grow, we have to be in a position where we look to increase our gross profit margin quarter by quarter,” Carter says. Discussion Box’s gross profit margin is currently approximately 50%. “This is something we check in on daily to maintain visibility of the business’s performance,” she says.
4 ways to improve gross profit margin
1. Streamline your offer
Retail businesses could look through sales charts to see what’s been most profitable or sold the most, and remove less profitable or popular items from a product line.
For Discussion Box – which narrowed its focus to deliver services solely to senior women in business – carving out a niche within the saturated events industry has been key to increasing its prices, and therefore its gross profit margin. While its new approach did involve some compromise; for example, the business' target market is smaller, and there was a financial and time cost involved in rebranding communications, the move saw its average order value increase significantly.
"The upside of [the move] was we no longer had to compete on price, and we could charge for the value we offered," says Carter.
2. Renegotiate with suppliers for better deals
If you rely on suppliers, you could ask for a discount if you purchase in bulk or switch all of your business to them.
“Talk to your supplier, but don’t be aggressive," says Walker. "Consider what you’re paying for that you don’t value – and which of the supplier's costs you can help reduce.”
Walker illustrates this with a personal example. A company he worked in was receiving supplies in cardboard boxes, and the disposal of those boxes – which involved loading them into a crusher and then loading that waste into a truck – was using up valuable staff time.
The company proposed that the supplier replace the cardboard boxes with reusable plastic boxes, which meant the supplier saved 40p per box.
"We shared that saving equally and made several thousand pounds of additional gross profit a month," says Walker. "It also freed up staff time for other jobs.”
3. Upsell to existing clients
Once you've got a customer 'through the door' or on your website, can you entice them to buy more to increase your average order value? Can you tempt them with impulse buys, or use an email system to contact customers who have abandoned their cart?
Service-based businesses can focus more on client experience to increase their customer’s average order value, says Carter. “We focus on client retention and repeat business as it costs us significantly less to sell to an existing client than to gain a new one altogether.”
Discussion Box created a thought leadership content curation capability specifically designed to offer to existing clients as a 'bolt-on' to their campaigns. This helped to increase average orders "simply because our clients want to do more of what we offer", says Carter.
4. Increase efficiency and productivity
Carter admits that challenges with staffing in the early days of her business impacted the gross profit margin.
“We didn’t have people who were willing to roll their sleeves up," she says. "This affected the delivery of our services, which meant that we had to double down on work in order to satisfy our client expectations.” The company now focuses on finding candidates with specific personality traits and shared values, as opposed to focusing solely on experience and skills.
Automating manual processes – and building their own technology – has also helped to reduce direct costs, she says. “Elements of our bespoke event platform have reduced reliance on third-party systems and decreased the workload for our customer success team, giving them more time to focus on the customer experience,” says Carter.
Walker believes most businesses are overstaffed, which impacts the gross profit margin. “The companies testing four-day working weeks are proof of this; there is a lot more productivity to be had."
He suggests businesses look at each internal process and assess if they can be shortened or made more efficient. It's worth finding ways to encourage employees to get involved with this.
"Ask your people for ideas," he says. "When your profits grow, share that good fortune with your staff and you’ll hold on to the best talent.”
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Other ways to improve gross profit margin
Firms that offer free quotes or consultations can start charging a fee to do so, in order to filter out anyone who isn't a serious customer (and avoid wasting time on fruitless tasks). For example, a beauty salon could offer a paid skincare consultation, and make that fee redeemable against products stocked or services.
Other ways to improve a gross profit margin could relate to reducing direct costs, for example by switching to cheaper packaging.
Constantly keeping an eye on – and working to improve – gross profit margin will help a business remain resilient in turbulent times.
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2. Membership Rewards points are earned on every full £1 spent and charged, per transaction. Terms and conditions apply.
Sources:
[1] The Guardian, Energy prices could push UK inflation to 22%, a near post-war record
