When working with clients, I often find that the profit margins they garner could have been better if they changed their mentality around price setting. In fact, too many companies focus solely on top of line growth, whereas savvy business owners understand that the simplest way to grow profits is to focus on their margins.
I’ve come up with some ways to maximize your margins and earn more money. But first, let’s talk about the most common mistakes I see in my line of work.
Common Mistakes
One of the most common mistakes I see is a propensity to set prices, and hence margins, based on the level of effort expended to produce/provide the product/service. However, this thinking - while generally a good starting point - doesn't really do justice to the real sellable price and value of the product/service, because it leads to standard (linear) margins across the board. That is to say, margins end up being proportional to effort, which is not necessarily where they have to be.
Considerations: Adding Value
Consider this-- Product "X" took less time to produce than Product "Y". But does that necessarily mean its price should be lower? No -- it could be the same or more. The customer doesn't know what effort was expended…their view of price will be based on the value they see or perceive.
#1: Understanding Value
Price setting should be an effort in understanding the value that a product/service represents to the end customer through market research, customer surveys, and understanding supply and demand trends. When prices are set this way, margins will become variable (non-linear) and not linked to just the effort expended. The advantage of this is that margins can be maximized for each product or service based on the value they represent in the market.
Therefore, greater margins should be captured across product lines and services if you understand the value each provides, and take a good long look at the effort you expend.
Other Tips for Improving Your Margins Over the Long-Term
- Faster turnaround times. The quicker you can progress from order to delivery, the lower your overhead cost per unit will produce, which translates to improved profit margins. Take a look at your processes and think about what you can do. Can you speed up the process? Can you eliminate steps? Are there ways to shorten parts of the process? Can you automate, template, or pre-perform some of the steps? The faster you can make this cycle, the better your margins will be.
- Increase your average unit of sale by up-selling and cross-selling: When you increase how much you sell to your customer at one time, you improve your margins because you boost the purchase velocity and lower your cost-per-sale for overhead burden. Think about how you can increase your average unit of sale per customer, perhaps through richer offerings or larger units of purchase, or through cross selling complimentary products or services.
- Cut out low-margin clients, products, or services. Instead, invest that time and money in higher-producing parts of your company.
- Retain your customers. Do all you can to keep them actively purchasing from you, studying the most common "drop points" in your client's purchase history, advises Inc.com. Maybe you can strategically reinforce your business system to cut down on attrition, or maybe you should communicate with them better on how to use your product or service. There’s also no shame in offering a well-timed "gift," visit or phone call. Don’t be afraid to court your current customers!
But most of all, if you understand the value your services and products provide, in proportion to the effort you’re expending, you will experience greater margins across all categories. It’s simple in theory but difficult in application.
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