A business’s net profit margin is one of the most important profitability metrics that you should track when running a business. This metric is helpful when it comes to answering questions like whether your company is making money or you’re pricing your products right.

Generally, the higher your net profit margins are, the better your business is doing. If your profit margin exceeds that of the industry’s average, it means your company has a competitive advantage. In other words, your business is doing well compared to others running a similar operation as you.

With that knowledge, it’s clear why there is a need for business owners to devise a plan to increase your company’s net profit margins. That’s what we’re here to help you do. But before that, let’s define what a profit margin is.

What are Net Profit Margins?

Your net profit margin, also known as profit margin, or net profit margin ratio, is the measure of profit your company earns from its total revenue. Companies use it to determine how much profit they made for every dollar of revenue that comes to the business.

To calculate a company’s net profit margin, use the following formula:

Net Profit Margin (%) = (Net Profit / Revenue) x 100

Your profit margins show how much your company gains after each transaction. It’s the amount the company earns after the costs such as rent, manufacturing, raw materials, and other expenses have been taken into account. The higher your profit margins are, the better your company is doing and the higher your company’s chances of growth.

A  profit margin not only shows a company how much profits it’s earning, but its metrics can also be used as a measure of success. By calculating a company’s profit margin, we can assess how the business is doing compared to competitors.

5 Strategies to Boost Your Profit Margins

Here are a few strategies you can use to increase your small business’ profit margins

Take Unprofitable Products off the Shelves

Do a performance review of your products and determine which ones aren’t bringing in as many profits. There’s no point continuing the production of a specific product if it’s not selling well in the first place. As much as possible, make sure that all of your products are contributing to your profits. Doing so will help you eliminate some costs and improve profitability.

Avoid product markdowns as much as possible

One of the many killers of profit is markdowns. Markdowns happen if there is too much inventory that needs disposing of immediately to release the money tied to the stocks. When that happens, the business could lose the profits from those particular products.

As much as possible, avoid product markdowns by improving your inventory’s visibility. Keep track of the quantity of stocks coming in and out of your warehouse. It’s also essential to study the product turnover to identify slow and fast-moving products. Once you have that, you can make better decisions regarding which types of inventory to stock up on and which ones you should reduce. In turn, this will speed up product turnovers, eliminating the need to markdown your product prices.

Market to your existing customers

Did you know that marketing to your existing customers costs way less than when you’re trying to attract new ones? This is because current customers have already been converted, which makes it easier to upsell and cross sell to them. It’s important to maintain their positive experience and target their needs effectively to keep them coming back and recommending your brand to others as well.

Creating a loyalty program for your existing customers is one effective way of encouraging them to come back or spread the word about your business to their circle. Loyalty programs could come in the form of cashback, discounts, or exclusive sales. Offering these to existing customers will increase your chances of converting them into your brand’s evangelists.

Streamline to reduce overhead costs

Streamlining operations is one of the biggest drivers of business profitability. Conduct a review of your company operations and identify areas where you can cut costs. For example, reducing the packaging for your products. Try to look into a low-cost alternative that you can switch into to save money and increase profitability.

You can also streamline your company operations by automating tasks. For instance, using a a CRM solution to automate sales processes could save your staff a lot of time and avoid human errors. Automating aspects of your customer service process can also speed up issue resolution and reveal patterns that inform better services going forward. Marketing teams can use automation to time promotions based on customer engagement, targeting customers that are more likely to purchase based on their recent actions.   

Consider increasing your prices

If you’re consistently delivering high-quality products, excellent customer service, and attracting new customers but are still not seeing an increase in your net profit margins, you might want to look at your product pricing next. Have you increased your prices the past few months or years? If not, then it might be worth looking into.

Many businesses may think twice about increasing their prices because of the prospect of losing loyal customers. However, it’s sometimes necessary. It’s worth noting that costs increase with inflation. If your business isn’t regularly evaluating your pricing strategy, you could end up losing money in the long-run. As long as you continue delivering high-quality products and keeping your customer-base happy, a slight increase in your pricing is less likely to result in loss of customers or profit.

Final Thoughts

You don’t have to go through drastic changes to increase your company’s net profit. Even simple things like the options listed above can do wonders for your profit margin. Do your research and get your team together to assess where your company currently stands. Identify, plan, and execute the next steps to take your business’ profit margin to the next level by the next quarter.