Profitability is a measure of a company’s ability to generate maximum revenue while minimising costs. Although this sounds simple in theory, achieving profitability is harder in practice. Here are 10 tips to help maximise profits.
1. Reduce Operating Costs
Operating costs are the expenses associated with running a business. Operating costs include rent; utilities; equipment and inventory; marketing and advertising; research & development (R&D); sales, both general and administrative; and payroll.
Operating costs do not include costs directly associated with the production of your products, as these are accounted for in cost of goods sold (COGS) or, for large cost items like buildings or machinery, capital expenditure.
When companies need to cut costs, operating costs are often the first port of call because these expenses are not directly related to production. However, if implemented pre-emptively or unwisely, cutting operating costs can have long-term negative effects on the business. All cost-cutting measures must be reviewed, and their implications fully understood. Areas often targeted for cost-cutting includes marketing and R&D, but you need to understand the impacts these may have on sales and NPD not just now, but in the future.
2. Reduce Cost of Goods Sold
Cost of goods sold (COGS) are the direct costs associated with producing a product or delivering a service, including the raw materials and labour costs. It’s critical that COGS is calculated accurately and kept as consistent as possible so that products or services may be priced correctly.
To achieve this, companies must define, track and price the time and material resources needed to complete each build. By standardising the manufacturing process, you should be able to accurately anticipate true costs and avoid large discrepancies from one build to the next—thus standardising COGS.
Although COGS may be decreased immediately by reducing the labour cost or substituting cheaper components or raw materials, you must consider the longer-term implications. Cutting labour will cut costs but may leave you understaffed and recruiting new staff takes time and increases costs (as the travel industry is currently discovering). Likewise, reducing the quality of raw materials may well save costs now, but can impact on your product quality and thus impact on customer perceptions, and ultimately your brand.
3. Review Your Product Portfolio and Pricing
It’s important to understand the true unit margins for each product in your portfolio and update that data frequently. Review your current product portfolio: Are some products underperforming? Do you have difficult-to-manufacture products that are eating away at your margins, time and money? Would a price decrease of your highest-margin product increase sales? Don’t be afraid to discontinue products with the lowest margins or increase their prices.
4. Up-sell, Cross-sell, Resell
It’s much more expensive to acquire new customers, than to retain existing ones. One of the best ways to increase sales is by introducing your existing customers to new and additional products, via the practice of upselling, cross-selling and reselling.
Ensure that your sales team are trained in upselling techniques and know how to approach customers without being pushy or turning the customer off from the purchase. Cross-selling is also an easy way to increase a current customer’s consumption of products. Consider promotions to introduce customers to additional products, especially new ones.
Cross-selling can also be successful without a special promotion, or discount, simply with a recommendation that products pair well together. Cross-selling is a great tool for e-commerce, automatically promoting cross-sells based on items in a customer’s basket.
Reselling is a way many companies are generating additional revenue from their existing products. By offering a resell programme, customers can donate (or sell back) merchandise they no longer want but that is still in good condition. With some minor refurbishing and cleaning, this merchandise can often be resold, increasing your profitability and decreasing waste of unwanted items.
5. Increase Customer Lifetime Value
Understanding your customers and delivering consistently excellent experiences is perhaps the most cost-effective way to increase loyalty and acquire new customers via referrals. You can show appreciation for your existing customers, increase their lifetime value, deliver new leads and boost your profits.
There are several techniques for engaging with your existing customers: Offering incentives, encouraging referrals, asking for recommendations and reviews and ensuring that the customer experience is outstanding, which can engender a sense of trust and loyalty. In the days of social media, customer experience and engagement can set a company apart from its competitors in highly competitive markets.
6. Lower Your Overheads
How can profitability be improved in manufacturing? Often, the fastest way to higher margins here is negotiating better terms with suppliers to lower COGS. If you’re using more than one supplier to deliver the same component, consider economies of scale: If you increase your order incrementally with one provider while decreasing incrementally with the others, could you capitalise on a price break? Likewise, look across your portfolio: Have you started purchasing additional materials from an incumbent supplier? If so, have you renegotiated at each step and asked for discounts?
7. Refine Demand Forecasts
If you have more componentry or raw material inventory than demand, you’ll end up with increased cost to store it, or worse, have it expire and need to be replaced. Conversely, if you don’t have enough stock, you’ll end up increasing costs for rush orders and expedited shipping—both of which increase COGS. The ability to accurately predict required inventory based on historical demand, seasonality or sales forecasts helps mitigate both problems.
8. Increase Order Efficiency
Ensuring the correct product is sent to the customer the first time ensures satisfaction and maximises your profit. If an incorrect item is delivered, you will need to send the correct item, incur a second shipping charge—or a third for the original item if you want it returned—and spend more on labour to receive the returned item, inspect it and either repackage it to be put back on the shelf or dispose of it. Costs from incorrectly shipped items are totally avoidable with more efficient systems in place and a motivated and engaged workforce.
9. Add Recurring Revenue
Recurring revenue is a great way to add consistency to sales. There are two main routes to increase monthly recurring revenue or annual recurring revenue.
Added services for existing products, such as a maintenance programme, aftercare solution or extended warranty helps to increase the value and profit gained from the product. Product subscriptions can help to simplify the customer experience through automatic fulfilment of products that they routinely purchase. You can offer discounts on a product subscription which incentivises your customers and provides guaranteed ongoing revenue for you.
10. Use KPIs and Benchmark Regularly
Establishing benchmarks is key to evaluating your performance and enables continuous improvement. Reviewing KPIs regularly and addressing any outliers ensures problems are caught, and remedied, before major issues, and costs, arise.