Three practical strategies that can help increase profit margins in your business

Strategies for increasing your profit margin

The following strategies can help your business stand out from the competition and increase profitability. Review each option to identify which fits best with the unique capabilities and strengths of your business.

Strategy 1: Offer value-added services

Assess your current products or services to identify where you may be able to add unique value to your customers that complement your core offerings. Value-added services can help your business stand out from the competition and increase customer demand — improving your profit margin in the process.

Imagine a small bakery. The cost of ingredients may have increased in today’s economic landscape and fewer customers may be purchasing its products. It needs to find a way to improve its profit margin, and value-added services are a viable strategy for a business in this industry.

The bakery may begin to offer a personalized cake design service for birthdays, anniversaries, or weddings, in addition to its other product offerings. This value-added service enables the business to differentiate itself from its competitors and provide an additional level of service to its customers — increasing customer loyalty. Additionally, charging a premium price for this custom cake design service enables the bakery to increase its profit margin.

Where and how could your business introduce value-added services to your current offerings? These personalized experiences will help you reach new customers, increase the number of returning customers, and contribute to higher profit margins. 

Strategy 2: Focus on high-margin services or products

Shifting your focus toward high-margin services or products is another viable option to improve your profitability. These are the services or products that sell for significantly more than the amount they cost to produce.

Consider a skincare brand. It may be struggling to weather price increases to the ingredients it needs to make its products, as well as decreasing customer demand in the current high-cost environment. To improve its profit margin, it decides to focus on selling skincare products using all-natural ingredients.

The brand can charge a premium price for these products since customers are willing to pay more for high-quality, ethically sourced ingredients. Additionally, the skincare brand may develop unique packaging to create an exclusive feel to its products and stand out from its competitors.

The all-natural skincare products generate a high profit margin in comparison to the cost of production and delivery. By shifting its focus to selling more of those products, the skincare brand improves its profitability and remains competitive in a volatile economic landscape.

Assess your products and services to identify those that generate the highest profit margin relative to the cost of production. Additionally, conduct market research, cost analysis, and pricing strategies on your high-margin products and services. Once you have determined whether these products align with customer demand and market dynamics, shift your focus toward producing and selling more of these products to increase your bottom line.

Strategy 3: Manage inventory

Exploring opportunities to optimize your inventory management is another path toward increasing the profit margin of your business. Overstocking or understocking your inventory can lead to lost sales and excess inventory costs — and a strategy to manage your inventory will help your business improve its profitability.

A small manufacturing business that produces custom-designed furniture may be searching for opportunities to improve its bottom line as the cost of materials increases. It might complete an analysis of sales data and customer demand patterns to identify its most popular types of furniture and the components it uses to produce that furniture most frequently. The business may then implement a new strategy to manage its inventory and reduce costs.

The business may consider a just-in-time (JIT) method — or ordering and receiving inventory solely when it is needed during the production process. This method can help the business reduce the handling and storage costs associated with excess inventory. Additionally, this method decreases the risk of excess inventory becoming damaged or obsolete.

It’s also important to communicate clearly with suppliers to ensure they can provide the necessary materials to manufacture products on schedule and meet customer demands. These conversations may also reveal new opportunities to collaborate with suppliers on demand forecasting to ensure the business is purchasing and storing the right stock at the right time.

Evaluate your inventory to identify where you may be losing profitability and implement a management method that works best for the unique needs of your business. Effective inventory management will enable your business to reduce costs and increase its bottom line.

Take the next steps toward success

Offering value-added services, focusing on high-margin products and services, or optimizing inventory management are all viable paths toward success. A customized strategy will help you identify new opportunities to increase customer loyalty, stand out from the competition, and improve your bottom line in an uncertain economic environment.