Profit margin shows not only how much money your business earns, but how much you have left over after covering necessary expenses. Good profit margin gives a green flag to possible partners, investors and others who can support your company's growth.
In this article, we’ll take a look at 8 tried-and-true methods to increase your profit margin and grow your business. It’s up to you to decide which of these top strategies are right for your business.
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What Is Profit Margin?
Profit margin consists of the business revenue that remains after paying specific costs. It's sometimes called a profitability ratio.
Increasing your company's profit margin builds sustainability so your business can grow and thrive over time. It also creates a benchmark of success you can show off to potential partners, lenders, and investors. Business owners should become familiar with three different types of profit margin.
Gross Profit Margin
Gross profit margin, displayed as a percentage, shows how much money the company has left after production and delivery expenses. To find gross profit margin, subtract the cost of goods sold during a designated period from the total revenue for that period, then divide by revenue. Multiply the resulting decimal by 100 to get a percentage.
High gross profit margins reflect strong sales. Increases in this metric indicate that you're retaining a higher amount of profit on each transaction by increasing revenue and/or lowering the cost of goods sold.
Operating Profit Margin
This metric expands on the gross profit margin by factoring in other operating expenses along with costs of goods sold. These expenses may include but are not limited to:
- Advertising and marketing
- Insurance
- Licenses and permits
- Utilities
- Rent or mortgage
- Labor costs, including payroll
You can use this formula to find operating profit margin:
{[Total Revenue – (Cost of Goods Sold + Operating Costs)] / Total Revenue} x 100
Operating profit margin improves upon the accuracy of the gross profit margin and clarifies the impact of operating expenses on your business profits.
Pretax Profit Margin
The pretax profit margin also subtracts interest payments on debt from your revenue. You can use this calculation if you're concerned about how debt may affect the profitability of your business. While it's more comprehensive than the operating profit margin, it doesn't account for taxes.
Net Profit Margin
For the most detailed and accurate picture, you'll need to calculate net profit margin. For this metric, you'll subtract operating expenses, cost of goods sold, and tax and interest payments from your business revenue.
The formula for net profit margin looks like this:
[(Total Revenue – Total Costs) / Total Revenue)] x 100
You may want to calculate net profit margin if you think your tax burden dramatically impacts your business's bottom line.
What Is a Good Profit Margin?
Strong profits suggest a thriving, sustainable business. Each industry has its own indications of what constitutes a good profit margin. According to data from the Stern School of Business at New York University, online retail has an average gross profit margin of 41.54% and an average net profit margin of 7.26%. If your ecommerce store earns more than those margins, you have an above-average level of profit for your sector.
Outside of ecommerce, NYU reports an average total market gross profit margin of 34.58% and net profit margin of 8.19%. These numbers omit financial industry data since its profit margin of more than 85% represents a data outlier.
8 Ways to Increase Your Profit Margin
These tips can help your business increase revenue and reduce costs to maximize your available profit margin.
Detect and Improve Inefficiencies
You can start building a better profit margin by looking for inefficient processes. Audit each of your company's operations to look for ways you can spend less money or time without sacrificing quality or service. Areas to analyze include:
- Production costs
- Strategies to acquire and retain customers
- Manufacturing processes
- Operational expenses
- Sales gaps where you lose customers
- Competitive landscape
While this may seem like an overwhelming process, you can take it one step at a time. Each spot where you improve efficiency will reduce costs and improve your profit margin.
Set Achievable Goals
You don't have to revolutionize your profit margin overnight. Instead, strive for achievable, realistic, measurable goals during each quarter. Incremental growth will get your business much further than a big profit push followed by a slow and steady decline.
While it's good to have a big goal for business growth in mind, set the stage for success by creating smaller milestone goals along the way. You'll see better outcomes by taking minor but impactful actions consistently than by overhauling your operations every few quarters.
Effectively Manage Your Inventory
If you find you're losing profit by marking down items that don't sell, try changing the way you manage your available inventory. Review your sales data to keep a close eye on your available items and see what's flying off the shelves (along with what doesn't).
When you select Pay.com as your full-service payment infrastructure, you can get the necessary insights to make smart purchasing decisions on your Pay Dashboard.
Build Trust in Your Brand
Customers are more likely to purchase from businesses they trust. It can be difficult to take that first step when they haven't bought from a brand before. Connecting with your audience to build a trusting relationship creates a loyal relationship that will result in revenue over time.
You can increase your reputation as a trustworthy business by enhancing brand recognition with consistent colors, logo, fonts and messaging. Through Pay.com, you can personalize your checkout page so it fits your online presence.
Social proof can also satisfy customers who aren't sure whether to take the next step to conversion. Adding reviews and testimonials from people who align with your target market allows potential customers to identify with your current clients, hopefully resulting in higher sales.
Adopt a Value-Based Pricing Model
This pricing model accounts for the perceived value of the product in the eyes of customers.. According to Harvard Business School, if your audience sees your product or service as high-end, you can charge more than you can if they see it as lower value.
For this customer-focused model to succeed, you need to understand how much your target market would potentially pay for your product as well as your ability to access the necessary raw materials and supplies for production. If you can analyze this data, you can tap into pricing that aligns with customer view on value.
You can also take steps to increase your brand's perceived value so you can justify a price increase. Examples include competitive advantages, new functions and features, adherence to standards like fair-trade and environmental mandates, luxury and status signifiers like premium packaging and materials, and a unique design.
Emphasize Existing Customer Retention
You've probably heard that it costs less to keep an existing customer than it does to attract new clients to your business. If you want to boost profit margins, you can focus on increasing purchase frequency and value for those who already buy from your business.
Follow up with your market often to show how your service and product benefits their bottom line. Ensure you have a strong customer care process in place so you can quickly handle questions and concerns. Send high-value offers and coupons or start a loyalty program so they feel like the money they spend with your business is a worthwhile investment.
Master the Art of Upselling
Suggesting additional products with each purchase can significantly boost your profit margin. You're increasing your average order value (AOV), a metric that has a notable impact on your revenue. To find AOV, divide your company's total revenue by the number of orders for the time period in question.
If you have an ecommerce store, try adding a CTA on each product page with a headline like "Complete Your Shopping Bag." The associated items should align with what the person is already purchasing. This is also a great way to showcase the most profitable products from your inventory.
If you have a brick-and-mortar store, put your suggested add-on items near the register. This tried-and-true strategy appears everywhere from clothing boutiques to grocery stores and beyond. What's more, these additional purchases are nearly pure profit since you aren't spending extra money on advertising and marketing.
You can also increase AOV by running specials on product bundles and adding incentives like a minimum threshold for free shipping.
Negotiate with Vendors and Suppliers
Even small price discounts and savings can give your profit margin a big boost. Start by analyzing the true cost of each product you sell. After all, you're adding tax, shipping and other fees to the wholesale rate, so your market may not support the final sticker price.
If you pay suppliers and vendors on time and maintain a good working relationship, they'll be more likely to give you a price break from time to time. You may also be able to negotiate perks like free items or complementary shipping. Ordering in bulk can also dramatically cut your per-item price depending on the product.
Every once in a while, spend time shopping around for better prices on the costliest items for your business. You may be able to take advantage of big savings simply by switching suppliers.
The Benefits of Working with Pay.com as Your Payment Service Provider
If increasing your profit margin is a business priority for this year, consider using Pay.com as your full-service payment infrastructure. Our solutions can help reduce your overhead costs and improve your revenue by:
- Building customer trust through strong security measures and personalized payment pages
- Reducing your bill for payment services with our transparent, flat-fee-per-transaction structure
- Optimizing your checkout process to reduce friction that disrupts purchases
- Making it easy to accept multiple methods of payment, increasing the likelihood that your target market will buy from your brand
You can set up your payment platform in just a few minutes, whether you're looking for a no-code way to accept payments or you're in need of advanced options like APIs that plug into your existing website.
Click here to get started with Pay.com now.
The Bottom Line
Good profit margin puts your business in a strong growth position. It can help you attract the right people to meet your goals, whether that means talented staff, interested investors or innovative partners. Tracking your company's profit margin helps you understand where you're falling short and how you can improve this key measure of success.
Pay.com can help you implement several of the strategies on this list. We offer an affordable platform with expansive capabilities that can grow with your business. It's easy to accept multiple methods of payment with our secure, intuitive tools and resources. Click here to create your account now.
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