How to Increase Your Profit Margin

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Coins representing increase of profits - How to Increase Your Profit Margins
Christine Lee
Christine Lee
August 21, 2020
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Category:
Operations

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UPDATED:
September 3, 2020

Your profit margin is a measure of how well your business is doing. While many business owners focus on top-line sales growth, they should also consider increasing their profit margins. Profit margins are a metric that you should continuously track and try to improve. In a study of 13,000 retailers globally, the average gross profit margin for retail is 53.33%. Although these vary from industry to industry, lower profit margins are usually associated with alcohol and sporting goods, while non-alcoholic beverages and jewelry have greater than 60% profit margins.

How to Increase Your Profit Margins‍

Most business owners worry about increasing sales, but some can figure out the correct profit margins, so there is money left for marketing to grow sales continually.

Here are five strategies to help you increase your profit margins.

1. Improve Inventory Visibility to Avoid Markdowns‍

Inventory report helps make smarter choices.

One thing guaranteed to kill your profit is markdowns. Whenever you have to markdown a product, it’s likely because it wasn’t selling well. Whether the inventory manager, product manager, or boss, you should always know what merchandise is selling and what isn’t. This can help you make smarter choices for vendor purchases, marketing, and sales.

Ideally, you have a product information management (PIM) system that gives you updates on all products being sold. Did you know the brand ASOS adds about 4,000 to 5,000 new products every week to its website? Their system is designed to respond quickly to recent trends and customer data.

2. Increase Brand Awareness and Perceived Value‍

Beauty and lifestyle brands are great at invoking a personal and emotional response with their customers, whether selling lipstick or skincare. This is one of the reasons that cosmetics enjoy a 58% profit margin.

In essence, be like a beauty brand even if you are selling tires. How can you connect with your customer and create more brand awareness, particularly on social media? Your brand should also have a high perceived value, such as a designer product would have. The best way to do this is to focus on emotional and lifestyle ties to your audience.

3. Reduce Operating Expenses‍

Paying with mobile phones - POS automation process

Every business can be more streamlined. McDonald’s has made millions doing just that. The first step that many operations managers take is to cut overtime and excess staffing. Then they’ll focus on waste. For example, fancy packaging may be scaled back a bit, or you can switch to a more modern, lower-cost point-of-sale (POS) system.

Another way your business can streamline operations and reduce costs is through automation. For example, you can automate inventory reports or transferring data to other departments, rather than have a human do it. Most new POS systems can communicate with multiple databases and software integrations. Automation frees up more time for your staff to work on other projects.

4. Raise Your Average Order Value (AOV)‍

Amazon recommended product area

What if your shoppers were encouraged to add on small items at checkout? There are new plugins and customer data that communicate, allowing your website to share related items or previously viewed items to visitors who are checking out.

For example, UberEats has a pop-up before you can check out that lists several items to add on to the order just as the visitor goes to submit their order. This can increase your order by $5 to $20 or more, depending on related items.

Ultimately, these additional items increase your average order value. There are likely many products on your website that are purchased together. Amazon shows what other customers are buying with the item on any given product page. This is based on customer purchase behavior and product inventory data.

‍5. Invest in Customer Loyalty‍

Free coupon, customer reward - customer loyalty programs

While customer acquisition and new sales are essential, you’ll make a ton of money by appealing to those who already purchase from your business. Whether offering a customer loyalty program or exclusive discounts, as well as recommending products that they’ll love, your business can increase profits just by looking for opportunities with returning customers.

If you have customers who haven’t purchased in a while, social media is one way to reach them. You can create customer segments by querying your CRM with data about previous purchases and then creating targeted campaigns directly with these lists.

For example, your CRM has data about customers who purchased once within 90 days. Do you have a new offer related to their previous purchase? You can even promote a discount directly to these customers who have recently ordered from your business. Facebook allows you to target customer email or phone number. Still, there are also 35 million ways to target customers through demographics, online browsing behavior, previous purchases, employment, and many other factors.

Also, marketing with software can increase brand awareness, making it easier to sell products online.

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