Is the only way a firm can increase its profits is to increase its sales revenue?

5 ways to increase profit in your business

How to Increase Profit

Written by Alan Davidson

Alan Davidson is a Chartered Accountant, director and founder of Pentins Business Advisers, entrepreneur and author of the Amazon best-seller “Achieve Your Business Vision”. With over 25 years of helping businesses succeed, Alan knows how to build a business with real value, while avoiding costly mistakes.

The profits of your business are what you are left with after receiving your payments and paying off your expenses. In short, Sales – Cost of Sales = Profit. A high profit typically means that the business is doing well. Therefore, a higher profit will increase the value of the business, and also allow the business owner to take more money out of the business to increase their personal wealth.

It’s easy to think that growing your business is all about sales, but in reality it’s all about profits. If the cost of sales is higher or equal to your sales, leading to a negative profit, you end up in a downward spiral and race to the bottom. In terms of business growth, profit maximisation should always be one of your main goals. There are five main ways to increase profit in your business, all of which are listed below.

Ways to increase profit in your business

1. Increase your prices

The natural instinct of many business owners is to decrease prices to stay competitive, but the reality is that a reduction in prices would have a dramatic negative effect on the business profits. If you were to decrease your prices, you would have to sell a higher quantity and attract new business to keep the same amount of profits as before. This usually only works in very specific industries, where products are highly competitive on price.

Instead of reducing your prices, many businesses could actually benefit from increasing their prices. Even a slight increase in price of 1-5% can drastically improve your profits. There is always the worry that a price increase will lead to a loss of sales. But actually, even taking into consideration that you might lose some of your sales volume, you will usually see a positive impact on your profit. This means you will be making more money per sale, with fewer sales overall. More money for less work!

2. Increase the number of customers

Obtaining new business can be quite the challenge, but it’s a great way to increase your sales and grow your profits. By building your customer base you not only make more sales, but you’re adding a completely new person to your network, and hopefully, if they are happy with your product or service, they will give you repeat business. Reaching out to new customers and markets usually requires some sort of targeted marketing. There are many options for marketing, from handing out flyers in the street, to TV ads and digital marketing. Choose a method that works for your type of business and your ideal clients.

3. Increase how often your customers make purchases

Keep your customers coming back! Increasing the amount of sales doesn’t have to rely on finding new customers. Instead you can sell more to your existing customers. If you’re selling an annual garden clean-up service, encourage your clients to repeat it twice a year. Clothing stores release new collections and have sales every few months to entice customer to come back. Hair dressers can remind their customers that they need regular hair cuts – and encourage them to book the next appointment before they leave the salon. The real key to this is to create systems and strategies within your business that can be used with all clients and customers.

4. Increase the amount that customers purchase

Even if you keep the same customers, the same prices, and the same rate of purchase, you can increase your profit by simply making them buy more. This is where up-selling really comes in. There are many examples of this; shoe shops selling protection products, online stores recommend similar items other customers bought, restaurants asking you to go large on meals/drinks and many more. The key is selling appropriate high value, low cost add-ons, at the buying point. There is a whole new field of research, called behavioural economics, which helps influence this method. Up-selling is also very possible in the service industry. Personal trainers can up-sell nutrition guides, a car wash can up-sell polish services, and a web designer can up-sell photo edits.

Up-selling typically requires a strategy of where to place the items in your shop, and how to offer them to customers. As a starting point, you could research how some other businesses in your industry do it.

5. Increase the efficiency of product/service creation

Instead of increasing sales, you can increase your profits simply by lowering the cost of sales. Putting systems in place to make your products or services more efficient will directly affect your profit. The idea is to reduce wasted time and material, and any other costs your business has. Consider a barber where you can only book appointments via the phone. They will have to pick up the phone, agree to a suitable time with the customer, and scribble it down in their diary. In a normal work week they will have wasted hours on the phone instead of servicing customers. By implementing an online booking system on their website, they could save valuable time, and fit in more customers every day.

Replace inefficient systems and expensive production costs, and you will find your profits growing without doing anything differently.

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