5 Tips for Optimizing Your Profit Margins

by Laura McCamy

2 min read

The best way to increase your income as a small-business owner is by fattening up your profit margins. Some of the steps that can help you improve your bottom line may seem scary — but they shouldn’t. Rather than clinging to the safety of a pricing or sales strategy that may be slowly draining your resources, making a few changes can improve your bottom line. Try these five tips:

1. Know Your Margins

The first step to optimizing your profit is understanding it. It is a good idea to look at your gross profit margin often and break it down by clients and products or services. You can use this simple equation:

Gross Profit Margin = (Revenue – Cost of Goods Sold)/Revenue

For example, if you bought a widget for $50 and sold it for $100, your gross profit margin is 50 percent.

2. Cut Costs

Talk to your vendors about pricing and find out if they have any special offers. There may be better pricing available for those who simply inquire. Be the squeaky wheel. When you buy new equipment, look not only at the purchase price but at the operating costs for competing models.

3. Raise Your Prices

This can be a sticking point for small-business owners. If you have a service business, raising prices can feel personal and scary. But at the end of the day, pricing is one more piece of information about your business. Price is one way to convey the message that what your offerings are of higher quality or greater value than your competitors’.

Raising prices may cause you to lose a few customers, but your profit margins grow even if your revenue stays flat – and that means more money in your pocket.

4. Heed the 80-20 Rule

This tidbit of economic wisdom that says 80 percent of your business income will come from 20 percent of your products or services. This is where keeping a close eye on your gross profit margin is essential. Calculate your gross profit margin on each individual product or service your company offers. It’s likely that some of them are dead weight and can be eliminated, while others pull more than their share of the weight. Streamline your offerings to include just the most profitable and you can use the energy that frees up to create something new and wonderful to wow your customers.

5. The 80-20 rule, Part 2

The rule applies to customers as well: Twenty percent of your customers probably account for 80 percent of your business income. Calculate your gross profit margins by client or customer type. The Clients who require a dozen phone calls before they will commit to the project and another dozen before they pay a deposit are eating into your profit margin. Don’t be afraid to detach from unprofitable clients. Identifying your best clients or customers and working on attracting more just like them is one of the best ways to beef up your bottom line.

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