Small-business profitability by the numbers
A U.S. Bank study found that 82 percent of businesses that failed did so because of problems with cash flow, and it’s easy to see why. Only 40 percent of small businesses are profitable, and 30 percent lose money on a continual basis. The remaining 30 percent break even, so they’re not turning a profit either.
Business owners who aren’t turning a profit can find ways to turn things around. At first, it may seem like the only way to increase profits is to raise prices, but it’s not.
Lessons on profitability from Apple
Before discussing practical strategies to increase small-business profitability, it’s a good idea to look at other profitable businesses to see how they increase their profit margins. Perhaps the epitome of profitable businesses is Apple.
Apple took the important step of increasing the ARPU by selling more expensive models. The iPhone X was the company’s first $1,000 model, and after it was released, the company saw its profits rise 40 percent year over year, thanks to the increased average selling price of $724.
Strategies for boosting small-business profitability
In the case of newer businesses, raising prices may not be the correct first step to raise profitability because they haven’t built a reputation yet. However, if prices are much lower than the competition’s prices, an increase may be necessary.
Here are nine other strategies for boosting small-business profitability.
1. Find more customers
Aside from raising prices, the other obvious option to increase small-business profitability is to find more customers. Business owners can do this through a variety of marketing channels.
Advertising is the most obvious marketing channel, and it can take the form of digital, TV and radio, and other print ads. Information marketing is another option. It includes publishing articles online, often targeting keywords that relate to the business.
2. Gather more leads and market to them
Marketing and advertising are just one step in the process of getting new customers. The other part of the process is collecting contact information and reaching out to prospective customers.
Many small-business owners don’t take nearly enough time to follow up on leads. However, this can be one of the greatest areas of waste in any business.
The average salesperson only follows up with prospects two times, but half of all sales happen after the fifth contact.
Getting leads often costs money, so marketing dollars are wasted by not following up on the leads that were gathered.
3. Increase the average size of orders
Customers who already spend money at the business could be convinced to spend even more money there. Thus, current customers are one of the best sources of additional business.
Business owners should cross-promote other products or services they sell to increase their average ticket size. Upselling clients more expensive products or services is another way to increase ticket size.
The key is to explain why customers might want to buy the more expensive product and how it will make things better or easier for them than the less expensive model.
4. Add new products or services
Offering products or services that are adjacent to what the business already sells is an easy way to increase the size of orders and attract more customers. Business owners can ask current customers what types of products or services they would like to see to learn where they can get the most value for their investment.
It’s also important to research the market before diving into any new product or service. One important question to ask when adding new products or services is what kind of margins they will offer. Higher-margin businesses like services offer significant profits with less overhead.
5. Cut expenses
Profitability is measured by gross and net margins, especially net margins. Reducing expenses will increase the net margin as the business owner spends less on operations, increasing profits in the process.
Cutting expenses may include switching to a less expensive supplier, spending less on supplies or reducing staff or staff hours. Laying off staff members is one of the most difficult aspects of business, but it can be necessary.
Business owners should calculate their productivity ratio by adding their total payroll and payroll-related expenses, then divide the result by the number of sales they bring in. If the productivity ratio is greater than 100 percent, it may be time to start looking at staff cutbacks.
6. Look at line items for more clues
It may not be obvious where expenses can be reduced, so it becomes necessary to break down the budget by line item, looking at each product or service and the expenses involved in selling them. Not every product or service might be profitable, so examining each one individually can enable business owners to root out the ones that are running at a loss.
Analyzing each line item in the budget enables business owners to see exactly where their money is going and how much it costs to do business for every section of the business. Some segments may simply be more trouble than they are worth.
7. Do more with less
Business owners should also consider how efficiently their operations are running. When considering the expenses associated with each product or service, it’s also important to look at which products or services bring in the most revenue.
It makes more sense to spend more money in areas that are bringing in more revenue than others. Business owners may even want to consider cutting products or services that are expensive to maintain but don’t bring in much revenue.
Any products or services that are cut can then be replaced with ones that can capture significant amounts of revenue with fewer resources or capital being allocated to them. The focus should be on high-margin products and services whenever possible.
8. Monitor inventory levels
Storing products costs money, which means inventory storage can be a sneaky expense that takes up more money than noticed initially. Businesses shouldn’t be spending money to store items that never sell, so it’s important to monitor inventory levels continually.
Inventory-management software offers an excellent way to stay on top of which items are selling and which aren’t. The software makes it easy to keep products that sell well in stock while getting rid of products that don’t sell and merely take up shelf space in the warehouse.
9. Look for ways to increase your return on investment
How much is being spent to get sales? There are many ways to market a business, but not every marketing method works well for every type of business.
Business owners should evaluate each marketing method they are using to see which are paying off the best. It might be time to eliminate one or two marketing outlets to focus more on the top one or two that give you the greatest ROI on invested ad dollars.
It’s always important to conduct regular audits of the business, even when it isn’t struggling to turn a profit. Staying on top of where the business stands will enable owners to head off profitability issues before they become something that puts them out of business.
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