The primary goal of any business is to maximize the profit it earns. Along the way, you also want to offer the best possible products and services to your customers, you may want to be sustainable, and you may want to have the best possible team working with you for business growth, but the bottom line remains the same: you want to increase your business’s profit margin.
To that end, what is the profit margin? According to Investopedia’s rather succinct definition, it is a measure of a business’s profitability, expressed as the percentage of revenue that the company keeps as profit.
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Profit margin for your business
There are multiple ways of measuring the profit margin, which leads to different types of profit margins, namely,
- Net profit margin,
- Gross profit margin,
- Operating profit margin, and
- Pretax profit margin
For our discussion here, i.e., how you increase your business’s profitability, we will take profit margin to mean net profit margin because it measures the overall profitability of a business after accounting for all expenses, including operating expenses, taxes, interest, and one-time costs. It is calculated as:
Net Profit Margin= Net Income / Revenue ×100
Net Income: The profit left over after deducting all costs from revenue.
Revenue: The total income from sales before deducting expenses.
With that clarified, let’s look at some actionable advice that can help you give your business’s profit margin a boost.
1. Optimize your pricing strategy
Increasing the prices of your products may seem like the perfect shortcut to increase the profit margin, but it can often be tricky, and for good reason. Customers don’t take kindly to sudden price hikes usually, and any business can only get away with it a few times.
To optimize your pricing in a way that works for your profit margin without alienating your customers, you need to understand the industry in which your business lies, do thorough competitor research, and review your pricing structures regularly. Also, there are specific things for which customers are willing to pay more in some product categories. For example, according to research by IBM, 77% of consumers consider sustainability and environmental responsibility to be at least “moderately important” brand values and Harvard Business School reports that sustainable products have 5.6x higher average sales growth compared to those that aren’t marketed as sustainable.
Also, it helps to keep the value-cost dichotomy in mind because customers, and in Indian customers in particular, are okay with paying more for high-value products. In fact, according to Tomohiko Sei, India CEO of Japanese lifewear brand Uniqlo, has also proclaimed that Indian consumers aren’t price-conscious, they are value-conscious. Therefore, if you optimize your pricing strategy by testing and adjusting the prices based on demand, competition, and customer willingness to pay, you can always expect to see a gradual increase in your profit margin.
2. Focus on customer retention
If you mean to profit, learn to please, Winston Churchill famously said.
In our context, it means that in order to increase your profit, your business needs to please the people who are bringing in that profit, i.e. your customers. Keeping customers pleased with your service, helps you to retain them—which is incredibly profitable because getting a new customer costs 5X more than retaining an existing customer for your business.
Here’s why focusing on retention can significantly improve your business’s profit margins:
Lower acquisition costs
Acquiring new customers involves costs like marketing, sales outreach, and promotions. On the other hand, retaining existing customers usually requires fewer resources. Loyal customers already trust your brand and are more likely to make repeat purchases without additional effort or incentives.
Higher customer lifetime value (CLV)
Repeat customers are likely to spend more over time compared to new customers. By fostering strong relationships and delivering exceptional experiences, businesses can increase the CLV, resulting in more sales with minimal marketing spend. Additionally, loyal customers are more open to cross-selling and upselling opportunities, which can further boost profit margins.
Word-of-mouth referrals
Satisfied customers often become brand advocates, recommending your business to friends and family, which can drive new sales at no additional cost to you. This organic growth not only expands your customer base but also lowers acquisition costs.
Retention strategies
Implementing loyalty programs, personalized offers, and top-notch customer service can make customers feel valued and encourage them to stay with your brand. Use customer feedback to continuously improve products and services, ensuring long-term loyalty and satisfaction.
In fact, did you know that as much as 65% of a company’s business comes from existing customers? To find out more about what you can do to retain your customers, refer to these easy-to-implement tips:
How to get repeat customers: 5 proven customer retention tips
3. Reduce operating costs
If you find it difficult to increase your prices, by simple mathematical logic, the simplest way to still increase your business’s profit margin would be a reduction in your operating costs.
Conduct Audit
Start by conducting an audit of your operating expenses like utilities, office supplies, rentals, etc. When you have a clear picture in front of you, ask yourself what are the areas in which you can compromise, and thereby reduce costs. For instance, if most of your teams work remotely, or if you work with a lot of freelancers, then do you really need to pay the rent for office space? Could you do without it? No cost-cutting measure is too small. Also, focus on negotiating better rates with suppliers and service providers.
Use technology
Whenever it’s possible, leverage technology and automation to cut down on your expenses. For instance, if you want to sell online, then you don’t really need to pay hefty sums to web developers to provide your customers with a good online shopping experience. Instead, you can sign up on Instamojo, and avail yourself of the option of choosing from hundreds of professionally branded themes for your online store.
Notably, since you cannot reduce your costs without accessing and analyzing the relevant business data, you must consider investing in cost-effective CRM and analytics solutions for long-term growth.
4. Improve sales efficiency
Increasing sales efficiency is key to improving profit margins because it allows businesses to generate more revenue without significantly increasing costs. Sales efficiency involves streamlining the sales process to maximize the output.
Streamline the sales process
One of the first steps in improving sales efficiency is identifying and eliminating bottlenecks in the sales funnel. Simplifying the steps from lead generation to closing a sale can drastically reduce the time spent on each customer. This can involve automating repetitive tasks, such as follow-up emails.
CRM for e-commerce
Customer Relationship Management (CRM) can greatly enhance sales efficiency by allowing you to track leads, manage customer interactions, and automate certain tasks. With a CRM, you can better understand the needs and behaviours of your customers. This data-driven approach can lead to higher conversion rates and less time wasted.
Learn more about how you can use a CRM solution to efficiently manage customers on your online store.
5. Marketing and automation
In almost every product category, there are a number of brands constantly jostling for space and competing for the customers’ attention. The businesses that figure out their marketing goals and strategies early on enjoy ample advantage over others in their industry segment, and it allows them to use their insights to shape up their product in a way that is optimally aligned with the market’s demand.
As such, utilizing marketing in smart ways can contribute a lot towards increasing a business’s profit margin. Broadly speaking, the marketing outreach of any small or medium-sized can broken down into the following mediums:
Targeted advertising
Through platforms like Google Ads, Facebook, and Instagram, businesses can create highly targeted ads that reach specific demographics, interests, or behaviours. This precision reduces wasted ad spend, as businesses only pay to reach potential customers who are more likely to convert. It also helps increase conversions and sales without increasing the overall marketing budget.
Content marketing & SEO
By investing in search engine optimization (SEO) and content marketing, businesses can attract organic traffic that doesn’t require ongoing ad spend. High-quality blog posts, guides, or videos can rank on search engines, driving long-term traffic and leads at no additional cost, significantly improving profit margins over time.
Email marketing & automation
Email marketing, combined with automation, can drive repeat purchases. Automated workflows—like abandoned cart emails or personalized recommendations—encourage customers to return and complete transactions, increasing customer lifetime value (CLV) without manual effort.
To make things more actionable for you, and to save you hours of research, we have compiled this helpful list of 13 best digital marketing tools for small businesses.
We hope that implementing these 5 tips will yield you great results and make a significant contribution towards increasing your business’s profit margin.
