Want to make more profit? Just sell more, right? Well, you know it's not that easy. In fact, there's been some dire economic news lately, the gist of which says sales are down across most industries. In the face of falling retail sales and low expectations for a swift recovery, what are the chances your company will be the one to defy the odds and triumph with a record sales season?
You might very well be that exception to the rule. But if you're not, that's OK too--there are other options. Here are the three quick ways to increase your company's profitability without making more sales.
Raise Your Prices (No, Seriously)
Research shows a small 1 percent increase in price can raise your operating profits by a whopping 11 percent. McKinsey & Co. found a price increase generated significantly more profit than the same increase in volume or a similar decrease in variable or fixed costs.
Even with this knowledge under their belts, companies have historically avoided implementing price hikes. According to pricing expert Ryan White, this trend has already begun to change.
"While a growth strategy like driving costs out might bring short-term spikes in margin improvement, it also may come with undue risks, like disruption to day-to-day operations or widespread layoffs," White says. "You need to consider both the safety and sustainability of your preferred growth strategy. That's why, when considering the most appropriate path to profitability, more companies are turning to pricing improvements."
While it can take years to build a meaningful increase in sales volume, pricing hikes can be implemented quickly--often in less than three months--and have an immediate impact. Take Amazon, which raised the price of its annual Prime subscription from $79 to $99 in 2014. Despite the $20 increase in price, the company expects to lose less than 5 percent of customers, resulting in a hefty $400 million in extra income.
Take a Look at Your Smallest Customers
If you could put all of your invoices side-by-side, you'd probably expect to see your biggest customers receiving your best prices. For most companies, though, this isn't always true. In fact, what you often find when you dig deep is the exact opposite--that somewhere along the line, your smaller customers negotiated the same, if not better, prices than customers placing exponentially bigger orders.
Sure, fixing this issue on a single small account won't make much of a difference in the grand scheme of things. However, when you seek to remedy this error on all of your small accounts, which could be hundreds or even thousands of customers, you're suddenly standing in the midst of what could turn out to be a major profit-increasing opportunity.
Be Wary of Volume Discounts
You're probably offering a variety of discounts to different customers, ranging from relatively minor deal-sweeteners like free freight to costlier, long-term perks like steep volume discounts. While it's natural to want to offer a discount to your best customers, it's also a way to erode your bottom line.
Here's why: each time you offer a discount, the lowered price becomes the new standard. So the next time that customer places an order--even if it's half the size of the order you gave her a discount on--she's going to expect the lowered price.
You don't have to enact an all-out ban on discounting, but you should communicate with your customers about price frequently. When customers understand why they're receiving discounts for a specific order, they'll start to learn the rationale behind your invoicing--and they won't expect discounts to last forever or apply to every order.
Over-discounting also creates a risk of profit loss. Most companies don't really know how much profit they're losing when their sales reps offer discounts. When they do find out, the truth can sting. In one example, every time a sales rep at a manufacturing company offered a customer a 5 percent discount, the company needed to sell 38 percent more product to maintain the same profit margin. Again, while you don't have to nix discounts altogether, you should set a discount ceiling to keep your profits from leaking too dramatically.
Let's be clear about one thing though. There must be very little tolerance for a lack of sales. While you should always be pushing for that in the long run, you can make a nearly immediate impact on your profit margin by following these three steps.