Increase your profit margins

Top line vs bottom line

There are two types of businesses: companies that focus on top-line growth (how much revenue you make) and companies that focus on the bottom line (how much profit you make).

A smaller business that has high profit margins could be far more valuable than a larger business with much smaller margins for a number of reasons:

• High profit businesses tend to have good cash flows, which means a cash cushion and money to invest in growth.
• Businesses that operate on low margins are often commoditised, which means they are operating in heavily competitive markets and selling based on price.

Did you know?

High profit businesses don’t necessarily make more money because they sell high-value products or services. They make more money because the business model is designed to be lean, to evaluate all costs, and to add each additional customer at either no cost, or a marginal cost.

Build a business model that focuses on profit margins

Do you want to be the biggest company, bragging about top line revenue, or do you want to be the most profitable company?

The problem that many businesses face from the outset is a flawed business model:

• Having a great product is important, but if you can’t monetise it, you don’t have a great business.
• Too many companies focus on getting users onboard without calculating the cost of acquiring and servicing those customers.
• Great business models are designed in such a way that when you add customers and sell more your margins increase, not decrease.

4 ways to design an effective business model

Here are four ways to design a business model that achieves increased margins.

1. Increase prices

Why would customers pay you more? Pricing is a delicate balance. Charge too much and you’ll struggle to make sales. Charge too little, and your customers won’t see the value in what you’re offering. If you need to increase your prices, then start by identifying your value differentiators.

2. Cut costs

This is an important step that many business owners tend to ignore. When you start looking at each expense critically, you’ll discover many unnecessary or high costs.

Consider the following cost-cutting strategies:

• Review your material expenses. Is there a cheaper material that delivers the same or similar quality? What do your customers really care about, and what is an unnecessary added expense?
• Negotiate with your suppliers. Are your suppliers willing to give you a discount in exchange for early payments or something else you can offer them as a trade-exchange?
• Improve operational efficiencies. Trim unnecessary expenditure or activities.
• Lower your overhead costs. Downsize your office space or encourage your employees to work remotely.

In Action:

When Gill Bowen and her husband, Tim Hartzenberg bought Shooshoos, the manufacturer of a toddler leather shoe brand, their focus was on growth.

Tight economic conditions meant that the entrepreneurs needed to make some adjustments if they wanted to increase both revenue and, more importantly, their profit margins.

The first thing they did was consolidate the manufacturing plant and head office, which were situated in two buildings that were a 45-minute drive apart. The arrangement was inefficient, both in terms of time and overhead costs.

The second thing they did was review their product range. Gill conducted focus groups to determine what customers wanted and realised that the large range of Shooshoos styles on offer was unnecessary.

Customers wanted styles that they could use with all outfits, and the additional cuts and leather colours were a cost that the brand could reduce.

With these simple adjustments, the business could focus on growth with healthier margins and lower costs.

3. Seek out high margins

Do you know which of your offerings have the highest margins?

• Calculate your cost of sale for each solution you offer. Find out more about how to do this here.
• Now calculate how much it will cost you to service a customer based on the solution you’ve given them
• Determine which solutions have the biggest margins
• Focus on the customer group that benefits the most from those high-margin solutions.

4. Up-sell and cross-sell

According to studies conducted by Bain & Co and Harvard Business Review, increasing your customer retention rates by 5% can increase profits anywhere from 25% to 95%. In other words, it’s much more cost-effective to sell to existing customers than it is to sell to new customers.

The way to do this is three-fold:

• Focus on maintaining strong customer relationships to increase customer loyalty and repeat buying.
• Determine where you can up-sell customers.
• Determine where you can cross-sell to customers.

Supercharge your start-up with a strong financial plan