Gross margin is what you have left after paying for your cost of goods. Make these tweaks to improve gross margin for your company and become more profitable.
What is Gross Margin?
Would you like to see improvement in your sales? Do you experiences great sales but suffer on your profits? Many small business owners may be able to say that sales are great, but their business struggles with cash flow and overall profits. This could be due to a failure to properly manage the gross profit margin on sales.
Here is the definition of gross margin:
Gross margin is simply the amount of money you have left after you pay for products or materials which you sell it at a higher price.
For example, if you pay $10 for a product wholesale and sell it to your customers for $20, you have a 50% gross margin, since half of the revenue you earned went to pay for the direct cost of the item.
If you pay $10 for a product wholesale and sell it to your customers for $20, you have a 50% gross margin
While the example above is a very simplistic view of gross margin, many small business owners and entrepreneurs are inexperienced at keeping a tight hold on their profit margins. And in fact, a 50% profit margin is pretty rare. Typical gross margins are usually around 10% – 15% and even as low as 3%. The lower your gross margin, the more you have to sell to see any sizable profit.
You can see that an unmanaged or out-of-control gross margin could be losing money for a small business because there simply is not enough gross profit to pay for all the fixed overhead expenses like rent, utilities, payroll, etc.
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Ways to Improve Gross Margin
So how do you get a better grasp on your gross margin and improve your overall profits? Here are 6 tried-and-true ways you can start improving your profit margin today:
1. Increase Prices
Most small business owners feel that if they raise prices, they will quickly lose customers, thus offsetting any additional profit they might earn. Though this is not always a favorite of small business owners, raising prices can actually work to your advantage.
Do a thorough study of your competition. Don’t just price your products to match competition. Instead, find out what the competition offers, and then offer something better. That may simply be focusing your products to serve a niche clientele, or structuring your product line to attract “boutique” type of customer base. Whatever the case, if you are going to raise your prices, you must improve your product.
2. Reduce Direct Costs of Goods
To increase gross margin, you can increase your prices, but you may also try reducing the amount you pay for the goods you sell as well. This may require negotiating with your suppliers for better deals.
Consider asking your distributors for lower prices. Can you purchase more product in bulk? That is leverage you can use to lower prices. Have you been a long-term trustworthy customer? Another mark in your corner to help you get better results.
It may ultimately take a bit of research to find alternative suppliers who will give you better deals. However, finding ways to reduce the amount you pay for goods or materials will help you increase your profit.
3. Reduce Inventory Waste
Get ready to forecast and plan your inventory much more efficiently. Many small businesses suffer because they lose a lot of money due to wasted inventory, spoilage, or even pilfering. Manage your inventory better, and you’ll have more product to sell.
4. Readjust Your Sales Mix
Do you sell a number of different products or services? Find the ones that offer the highest gross profit margins. You may find that your business focus may change as you readjust your mix to find the right combination of profitable products.
5. Integrate New Products or Services
Of course, if your business sells only one or two types of products, consider adding additional product lines or services. But if you choose to integrate, be careful how you select new products. Will it complement your current business? Will it require more focus to sell? And ultimately, will it bring in new customers and consequently more revenue?
6. Alter Your Business Focus
Sometimes a business must simply change its focus to become more profitable. For instance, say a photographer starts a business to take portraits and landscapes. The demand for these types of products is low and competition is high. But changing a focus to wedding documentary photography can add tremendous amounts of business.
Your small business should not have a sufferable cash flow needlessly. Use these options to help improve gross margin and you may find that your small business starts making more money right away.