Business managers commonly seek ways to increase the profitability of the businesses in which they work. Profitability is one of the most important metrics of business success and determines whether a business is likely to grow. Learning about various strategies for increasing profitability can help you implement specific strategies within your teams to increase revenue and decrease expenses. In this article, we discuss why profitability is important and how to increase profitability using 17 strategies.
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What is profitability?
Profitability is the ability of a business to produce more revenue than expenses. Companies typically produce revenue through the sale of products or services to consumers and generate expenses by paying their employees and producing their products or services. You can categorize business expenses as direct costs, which are the costs of paying employees directly involved in the production of a product or service, and indirect costs, which are also known as overhead. Overhead may include depreciation, property taxes, indirect materials costs and wages for employees that aren’t directly involved in the production processes.A profit margin is the amount of money that a business makes from the sale of a product or service. To arrive at a profit margin for a unit of a product or service, you subtract the indirect costs and direct costs from the price that customers pay for the product or service. For example, if it costs you $1.00 to produce a pizza, including all direct and indirect costs, and you sell it to customers for $5.00, your profit margin is $4.00 for each pizza.Read More:What Is Profit Margin?
Why is increasing profitability important?
Increasing profitability is important for many businesses, as profit generation allows businesses to continue to grow and compete within their industries. Increasing profitability can also help businesses secure funding from financial institutions, investors and shareholders. If a business currently doesn’t produce profit, increasing profitability may allow for the eventual generation of profit, which ultimately allows the business to continue to function.Read More:What Is Profit and Why Is It Important?
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How to increase profitability
Depending on the type of business and the industry, some strategies for increasing profitability may be more effective than others. Here is a list of 17 strategies that may help you increase the profitability of businesses that you manage:
1. Facilitate team contributions
One of the first strategies to help in increasing profitability is to meet with members of your team to establish common goals related to increasing profits. If team members are all aware of the goals of the organization, it can help them make decisions that assist in the completion of those goals and motivate them to increase their productivity. For example, you may hold a company-wide meeting where you discuss the goal of increasing profit margins by 10% within the next year.
2. Conduct market research
Conducting market research can help you identify target audiences and understand their motivations to purchase your product or services. Conducting this research can you determine the amount customers may spend on your products or services and help you market them better to consumers. For instance, if customers will spend $10 more on your products, you may increase the price to match that amount.
3. Analyze financial statements
Financial statements provide quantitative data on revenue and expenses that you can analyze to determine which processes you may adjust to increase profitability. Balance sheets, income statements and cash flow statements are all useful to analyze when seeking to increase profitability. For instance, you may determine expenses in one area are increasing as the business grows, allowing your team to focus on that area when making adjustments to improve profitability.Related:How To Calculate Profit (With Example)
4. Eliminate nonessential processes
Eliminating nonessential processes can help increase the efficiency of a business’s supply chain, decreasing its expenses. Nonessential processes may be tasks that your team may not need to complete in order to provide a high-quality product or service to customers. For example, if products go through a quality check before shipments and transportation processes ensure the safe arrival of those products to stores, they may not need to go through a second quality check upon arrival at the stores.
5. Decrease waste
Businesses can decrease instances of waste using several strategies, such as identifying and resolving processes that result in defects, decreasing overproduction, limiting downtime, increasing transportation efficiency, limiting excess inventory and limiting excess processing. All these strategies can increase the number of finished products or services that make it to customers and produce revenue for your organization. For instance, you may use software that tracks the expected demand for products within certain regions so you can produce the exact amount needed and transport them to the right regions.
6. Reorganize physical spaces
Many organizations analyze the way their employees move throughout their workspaces to determine where inefficiencies most often occur. Reorganizing the physical spaces in which team members work can help limit unneeded movements and allow for more efficient production processes. For example, you may place the break room closer to the manufacturing floor to help limit the time team members need to walk while working. Minor changes to physical spaces can make a large difference over a longer period of time.Related:Product Profitability: Definition and Methods
7. Create budgets
Developing budgets can help set strict limits on the amount that a business can spend on certain areas, decreasing the overall expenses of the business. Creating salary caps, limiting one-off costs and decreasing administrative costs are all ways to decrease expenses using budgets. For instance, your team may create a salary cap for executives of $300,000 to decrease the expenses the business incurs by paying employee wages.
8. Conduct extensive training
Employee training, especially for new hires, can help businesses improve their profit margins by increasing revenue and decreasing unneeded expenses. Training employees on practices that ensure the safety of all team members, strategies for increasing the amount that customers buy and strategies for reducing waste can all help improve profitability. For instance, you may hold a weekly safety meeting where you discuss the most common types of injuries that occur within the organization to help limit instances of those types of injuries.
9. Develop vendor relationships
Vendors provide businesses with many raw materials that help them create their products or services. Reducing the costs of these items through established relationships can help reduce the overall expenses of the organization and improve profitability. For example, you may establish a loyal relationship with a vendor, agreeing to purchase their goods for at least the next 10 years in exchange for a lower price on those goods.
10. Develop marketing and branding
A strong brand can allow an organization to demand higher prices for its products or services. Consumers may associate a brand with a specific level of quality that may motivate them to purchase products or services from an organization, even if it costs more. For example, organizations may market their products luxury goods in order to justify a higher price.
11. Increase sales prices
Increasing the sales price of products or services is one of the easiest ways to increase profitability. When making price increases, it’s important to understand consumer expectations of the price to maintain the organization’s revenue. For instance, if you sell 5,000 products for $5 more each, you may produce $25,000 more in revenue, while expenses remain the same.
12. Increase dollars per transaction
Increasing the amount consumers spend on a single transaction can improve profitability by facilitating the sale of products or services that may have a better profit margin. Businesses commonly attempt to increase dollars per transaction using up-selling, a strategy that involves attempting to sell a customer additional items or more expensive items while they’re currently planning to make a purchase. Organizations may also use product bundles to achieve these goals, which are two related products they sell together. For instance, a shoe salesperson may also attempt to sell customer shoelaces when they’re considering buying a pair of sneakers.
13. Keep high-performing team members
Productive members of an organization can add value through their work that helps increase the profitability of their organization. Team members who excel in sales, manufacturing, transportation and other essential areas of a business can all increase the efficiency and increase the revenue of a business. For instance, if a team member is able to produce 20% more sales activity than any other members of their team, they may provide immense value to their organization.
