Times are hard. We’ve spent the last few years on an economic roller coaster which has been enough to make even the hardiest of thrill seekers feel queasy. As a result, a lot of businesses are scrambling to survive, but you have to be careful of exactly how you go about improving your profit margins.
A lot of companies are upping their prices to try and improve profits. Some of them are genuinely trying to stay a-float, and some are, sadly, capitalizing on the situation and the misfortune of others. But this method is not always the best idea for your business, and it can actually cause a lot of harm if you’re not careful.
There is always that one guy who ruins it for everyone…
Ranking high on the “let’s profit from your pain” list, is the medical industry. The industry has been consistently pushing up prices on chronic medications that people literally can’t live without. The result is not always as profitable as anticipated, though, as greedy companies are losing customers, and in some cases it has backfired horribly. Martin Shkreli, former chief of Turing Pharmaceuticals, is now commonly known as “The most hated man in America” after buying out smaller pharmaceutical companies and increasing the price on certain chronic medications by more than fifty-fold! The effect has been an outcry against not only him, but against the pharmaceutical industry as a whole. Now although this may be something of an extreme example, the basic principle applies across the board.
If you suddenly institute dramatic price hikes, your customers are going to be pissed about it, and they will leave you.
Another, slightly less dramatic but equally noteworthy example of companies blind-siding their supporters, is the case of Upwork. The Freelance platform decided to change their pricing system with very little warning. The new fee structure has the average, small-time freelancer paying DOUBLE their previous charges. Although the sliding scale means that those earning in excess of $10 000 (on one client) pay a better fee, the message is clear: they don’t want to do business with the small-time freelancer. For many people, especially those using Upwork on the international circuit, most individual clients take months to break the $500 “20%” fee barrier. “Revolting!” you might say, and you would be correct, as once again the big guns take advantage of the smallest and weakest of the group.
The thing is, the company has essentially shot themselves in the foot. Previously loyal and honest members have taken to using devious methods of keeping their hard-earned cash in hand. Some are using the platform exclusively to find new clients and then working away from the system to prevent losing 22.9% on every dollar earned. Others have just upped and left completely, many of them migrating to other platforms or starting new ones. So instead of protecting their assets, Upwork has alienated them.
How to improve Revenue without angering customers
Now that is not to say you should never increase your prices, sometimes you must. But there are ways of improving your profits without inducing the righteous indignation of your customers.
First off, ask yourself – do you really need to up your prices?
If you consider the risks involved (possibly losing existing customers and putting off new ones) it could end up costing you more than it makes you. If you are just raising prices because you feel it’s the right thing to do, and not because you actually need to – then don’t. If you have an established client base who you want to keep, you aren’t burning yourself out with work, and you are making a profit (even if it’s small) then price hikes may not be the way to go. There are other ways of turning a higher profit.
Higher Net Profits don’t always mean a higher profit margin. Just because your bottom line is greater, doesn’t mean that you are making more money. You need to look at what percentage of that bottom line is profit compared to how much you spent to make it.
In other words, if you can find ways to cut costs rather than increase prices you will still be improving your profit margin. This doesn’t mean you have to skimp on quality, either.
There are lots of ways to improve the “dollar value” of your investments. It could be training your sales staff to make more sales for every hour that they work – the cost of the staff member’s salary remains the same but the dollar value of your investment in them increases. If you can cut your sales team from ten people making 20 sales a day to 5 people making 20 sales a day, you are reducing your costs and improving revenue. You could even offer those five staff members an extra 25% raise on their salaries and still be making more money.
Another area to look at is your ROI (Return on Investment) on advertising and marketing. If your campaigns are well planned, focused and executed you will get more sales out of every dollar you spend on them.
A lot of the time it comes down to planning and looking for the places where you are losing the most money with the least return.
Make sure you are targeting the right audience, and avoid pandering to customers who cost you more than they’re worth. It’s an easy trap to fall into – but the biggest, shiniest (usually nastiest and most face-pie deserving) customer, is not always the one who is going to do the most for your business and your profits.
Try to avoid having to rely on discounts to attract customers. Instead you should make sure that your product and your service is good enough to attract customers and keep them coming back.
If you HAVE to increase prices
Look at doing so gradually. Plan your total price increase to be staggered so that it doesn’t come as too much of a shock to your customers.
You also have to give them fair warning. Be honest about what you are doing, and turn it into something positive. How? Well…
You can offer additional benefits along with the price increase, and work them in. Perhaps you can offer free gift-wrapping, or throw in something of value to them, like an informational e-book or a guide (or even that dead stock you just can’t move).
Restructure your packaging with your pricing. When you increase the price on your original pack size you can bring out smaller pack sizes that cost less than the original but work out more proportionately per item (you used to sell a 6 pack of superhero underpants for $30 – now you are charging $45 for the 6 pack of underpants but the 3 pack is available for $25). This way the bigger pack seems like a bargain, even if it is more than it was, and there is an alternative option available.
Take a look at your shipping costs. If you have always provided free shipping you can look at making that option only for sales over a certain amount, or change to a shared shipping option where you cover part of the costs but let the customer pick up some of the bill themselves. This also encourages customers to buy more.
Analyse your expenses. Every expense your company has from raw materials to resources should be evaluated regularly to make sure that you are getting the most out of your expenses. Sometimes it can be more profitable to invest in new equipment than in a new company car. Or perhaps a marketing campaign. Make sure that the money that is being spent is bringing in as much revenue as possible.
Final cost cutting thoughts:
There are a lot of different things your company can do to improve your revenue without increasing prices or compromising on quality and service. Often the most difficult thing is having to sit down and take your business model apart. You have to challenge yourself and the way you do things. You are stepping out of that proverbial comfort zone and realizing that you might not be operating optimally. Sometimes it hurts the ego, but it could save your business.