3 Powerful Ways to Make Your Small Business More Profitable

Posted on January 29, 2016

The most frustrating thing in the world is to be in business and not feel like you’re making money. That’s the problem that you can face when your profit margins aren’t as high as they could be.

You can have much more money in your bank account when you properly leverage your profit margins. It’s easy to get caught up in getting more sales, but many times optimizing your profit margins could have the same impact.

Suppose I asked you if you would rather own a business making $10M in revenue or $2M in revenue? Many would choose the $10M.

The more important and often overlooked question is what are the profit margins? Well the $10M company has a 5% profit margin = $500k in profit and the $2M company has a 50% margin = $1M in profit. Now which one would you rather own?

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As seen on Forbes, Mashable,

That is just to illustrate the power of leveraging profit margins. When you maximize you margins, you can make more money without necessarily doing more work.

Here are three realistic ways to maximize your profits and make sure you walk away with more money in your pocket.

 

1) Increase Prices

Price Effective Lever to Maximize Profit

Data source: McKinsey&Co.

Increasing your prices is one of the easiest ways to increase your profit margins. You have to understand the price elasticity of your market and how your customers will respond. The truth is that price isn’t as objective as many people think. After reading the phenomenal book, Priceless – The Myth of Fair Value, my eyes were opened to how the billion dollar brands approach pricing and how people aren’t as price conscious as you might think.

These are some things you must understand to effectively raise your prices.

Value is Major

Value is one of my favorite subjects to talk about. Value is major.

Let’s say you have a custom made guitar for sale. You approach a guitarist and ask them how much he’s willing to pay for your customer guitar. He looks it over and notices the great headstock, pickups, and bridge (all guitar terms) and tells you that he’d pay you $1,200 for it.

Next, you take it to a lady that loves to hear guitar musicians but doesn’t actually play. She looks at it and thinks it looks cool and would love to hang it on her wall and offers you $75.

Whoa…

How is it that two people could pay completely different prices for the exact same product?

That’s because they both attributed two different levels of value to the guitar.

Money is a Measure of How Much Someone Socially Values Something - Mike Calloway Click To Tweet

Here’s why:

  • The guitarist saw tons value in the guitar.
  • The value was worth it to him.
  • He had the money to measure his value.

If any one of those three factors were missing, there would be no sell.

Here’s the woman’s situation.

  • She didn’t see much value in the guitar.
  • The value was worth it to her.
  • She had the money to measure her value.

The first important thing is that you must find customers who see the highest level of value in your product or service. Remember, we are talking profit margins here.

The second important thing is that your customers must be willing to measure the value they see in your product or service with money or a dollar value.

Third, your customers must have the money to be able to fulfill their measure of value. There are many people that see the value in things but don’t have the money to make the sale happen.

If anyone of these three factors are missing, no sale happens which doesn’t help you much.

 

Perception Matters

Perception is everything. Remember that the first step in making the sale at a higher price is that the person must first see the value.

Well there is no one price to determine the value of a product. Think about an auction, it shows us that the winner of the bidding obviously sees more value in that particular item more than others bidding (Or is caught up in the adrenaline of being competitive).

Perception Influences Businesses Profitablility

You must make sure that you build and present your product in a way that intensifies peoples perception of it.

Here are some ways that you can intensify peoples perception of your product or service:

  • Design – Can you improve how your service is designed?
  • Packaging – In what ways could you better package your goods to increase perception?
  • Function – Can you improve the functionality of it that demonstrates added benefits and ease?
  • Presentation – How can you present it better (silver platter) to instantly justify value?
  • Visible Quality – Are there some things you can do to the physicality of the good to add value?

You can apply these principles to different channels of your business. You ask these questions about your website, product, advertising, customer service process, and much more.

These are some things to think about but can kick your marketing and prices to the next level.

 

Get Paid What You Deserve

You deserve what you are worth and the value you provide.

Let me say this again, You deserve what you are worth and the value you provide.

Your Pay Determines Your Profit

Many times you can undervalue yourself in business. Especially when you’re just getting started.

I Will Teach You to Be Rich author Ramit Sethi often endorses negotiating salary and getting a raise. The same principle applies to business owners.

It’s critical to understand this.

Many times we undervalue ourselves and how much value we bring to the marketplace.

I see so many astounding people work for much less than they’re worth simply because they don’t realize how valuable they are.

Understanding how valuable you are can have a significant impact on the money you make.

Remember, money is a measure of value.

The more value you see in yourself, product, or services, the better you can communicate that value to others.

Understanding Self Worth Often Precedes Increased Net Worth - Mike Calloway Click To Tweet

The best way to understand your product or services value is to consider how much better you are than the competition and how you offer something unique to the market.

If your product or service does not already meet this criteria then you should consider how to make it better than your competitor and offer something unique to the market. That makes marketing a higher price and communicating added value much easier.

 

Provide an Experience

Your customers want to be WOWed. They want to brag about you to their friends and talk about how great they were to discover you.

You just have to give them a reason to.

Doesn’t it feel good when a business you bet on, shows up and exceeds your expectations?

You feel like you did something right.

Give your customers a reason to brag about themselves discovering your business Click To Tweet

Something you must always remember is that, people don’t just want a product or service, they want what it will accomplish for them.

If you could take them on a journey while meeting that desire, then you have struck gold.

Exceed Customers Expectations

That’s why movies have been and forever will be in demand. Because they not only entertain people, but provide them with an emotional experience, a journey.

Have you ever sometimes caught yourself in a movie theater reacting just like you are ‘in’ the picture? They did a great job at providing you with an experience.

Here are some ways you can provide an experience:

  • Customer Service
  • Over Delivering
  • Intensifying Experience Through Surrounding (Think concert or Starbucks environments)

When you can provide an experience that exceeds your competitors, you build brand equity in the mind of your customers. And when the customer needs that product or service again, guess who they’ll be calling?

 

2) Add Value That Doesn’t Exceed It’s Cost

While you’re adding all of this value to your product or service. Be sure to make sure that the rise in cost does not meet or exceed the value that it provides.

Make sure you are adding much more value than it cost so that you can increase your margins along with the price.

Add Value to Increase Profits

Profit Margins are Critical

It’s easy to get caught up increasing price and revenue. It’s also just as important to increase your margins when preparing your pricing strategy. That way you can make more money with the same amount of current business.

Imagine if you increased not only your price but your increased your profit margin as well (decreased cost) simultaneously. Your business would skyrocket!

Increase profit margins, price, and customers to skyrocket your business. Click To Tweet

It’s a numbers gain that harnesses the power of compounding. Ask any billionaire and they’ll tell you, compounding is their best friend.

Warren Buffett attributes much of his increasing wealth to compound interest.

“My wealth has come from a combination of living in America, some lucky genes, and compound interest.” – Warren Buffett

Increasing your margins along with price allows you to compound your income and see breakthrough results.

 

Upsell

Upsells are another form of price increases but is highly underused. Successful brands successfully leverage upsells and integrating them into their sales strategies.

JetBlue projected to make $190 million in additional income in 2014 using upsells.

Upsells Can Add to Your Take Home Pay

While I no longer care much for their food, McDonald’s has made billions through upsells.

Would you like a large fry with that? #Upsell Click To Tweet

A beauty of upsells and cross selling that is often overlooked is that you didn’t have to pay to get the sell of the cross or upsell. That means that those products or services have higher profit margins since acquisition cost were likely taken care of when they purchased your initial product or services.

Some businesses even choose to break even on the initial sale in hopes that they can make their sole profit from the upsell.

Upsells is a subject within itself that can hardly be exhausted. It can be another form of price increase that can, according to Neil Patel, double your revenue.

 

Add-Ons

This is closely related to upsells but is different and deserves it’s own consideration. An add-on is a product or service that is not the primary service, but rather a complimentary or add-on service. So using the same McDonald’s illustration from earlier, the upsell would be asking the customer if they would like a large fry instead of a medium. An add-on would be for them to get an apple pie or milkshake with their order. The add-on is an addition and compliments their original order.

Image if you could make more money from the same client that you acquired through advertising. You would greatly increase your profit margins. It’s also much easier for a current client to purchase MORE from you than for you to get a new client.

Ethically, add-ons are great for clients. It’s not a matter of sucking more money from clients. It’s simply providing MORE value to them in a different way, therefore you deserve more money.

Add-ons and upsells are what separates the $100k businesses from $1M businesses. Your ability to leverage them effectively will determine your altitude in business.

 

Charge For Value Instead of Time

Charging for time or hourly is a common practice in industries like consulting. Sometimes it is the most effective pricing strategy. In some cases it may be more profitable to charge for the project or value instead of time.

This can be a double edged sword. Since sometimes you can have a price that was agreed upon and you do more work than you initially thought it would take. But sometimes you could finish the work quickly and get paid a premium for a minimal amount of work.

This same “bundling” strategy applies to products just as much as it would to services. You could bundle products or services to justify and command a higher price. This works especially well when you can bundle things that can’t be purchased separately with your product or services. This gives you more control to raise prices at your discretion.

 

Create Secondary Products

Sometimes you can break up your product and require people to buy other products from you. This is called creating secondary products.

Secondary products are products that rely on a primary product to justify their value/use.

They are very popular and many people don’t even notice them.

Think about digital camera manufacturers. They often sell lens’ and battery packs separately, creating for them the opportunity to keep selling to the same customer repeatedly.

In your case you want to consider making something that is already included in your primary product, a secondary product.

Microsoft does this with the Xbox.  People usually purchase an Xbox system or bundle that comes with minimal video games. This forces the customer to by the video game or disc from them or the secondary market. So Microsoft makes a large transaction selling the system, but the money they make off of selling games, controllers, and subscriptions can quickly exceed the purchase price of the system. This is beautiful execution of using secondary products to your advantage.

 

Iterate to Find the Perfect Threshold for Scalability

Gucci's price elasticity and Iscalable business models

When increasing your prices, you want to make sure that you are also optimizing them for scalability. This is very relevant to price elasticity.

Price elasticity is –

The higher you make your price, it is likely that you will serve less people.

You want to find the sweet spot that allows you to maximize price without giving up too much of the market.

It’s the process of finding that threshold where you can demand the highest price while still serving the highest amount of people.

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Many people often go to the extremes on price. Two extremes would be:

  • Walmart

or

  • Gucci

Walmart sells products at an extremely low price which means that large quantity of people would likely do business with them. Gucci sells products that are thousands of dollars which means that they would likely have a lower amount of customers than Walmart due to their price sensitivity.

You don’t have to take Gucci or Walmart’s approach. Rather you can take Starbucks or Apple’s approach. This way you can charge a premium in proportion to your competitors but still serve a ton of people.

Apple and Starbucks are perfect examples of finding the sweet spot of having the highest price possible and serving the most amount of people.

You can also be Walmart or Gucci and make great profits (they both do).

I love Apple’s and Starbucks positioning and pricing model.

 

3) Eliminate Waste

The Law of Compensation: Your income is determined by how many people you serve and how well you serve them. – Bob Berg, The Go-Giver

Increase Quality of Leads

A surefire way to make more money and increase your profits are to increase the amount of qualified leads your business receives. Notice I said qualified leads. I used to focus on just getting leads until I discovered that it is not the lead that is important, it’s the quality of the lead that matters most.

The more targeted you can get in lead generation and the higher quality of lead that you can acquire, is major to being efficient with high profit margins.

If a bunch of unqualified people are visiting your website and calling your phone, they are wasting your time. That is valuable time that your team can spend converting higher quality leads. When your team works with high quality leads, you get a better ROI from your team and marketing efforts.

Now that we know that the quality of the lead is important. Once you have pinpointed what a high quality lead is to you, then you can start looking to increase your amount of high quality leads. This will take a targeted and intentional approach from your marketing efforts.

Take some time and determine who the clients are that spend the most money with your business and give you the least amount of hassle. What do they have in common? How did they find your business? How can you find more of them?

This may mean focusing your paid advertising efforts. It may mean starting a referral system to motivate them to refer people like themselves. It may mean creating a strategy that gets them to purchase from you more frequently.

What you must do to grow exponentially, is to increase your business’ amount of qualified leads.

 

Increase Conversions

http://stuartjdavidson.com/file/2015/07/Win-More-Customers-Via-Conversion-Rate-Optimisation.png

Now that you have more qualified leads coming into your sales funnel. You need to make sure you are converting as many of them into customers as possible. This means that your phone script and email sequences are always being tested and optimized to discover the best approach to get customer to do business with you.

You can use analytical tools like Hotjar, Google Analytics, CrazyEgg, and more. These will help you record, track, and measure engagement so that you can optimize your leads experiences to become clients.

You will also want to follow up with leads that do not convert. Interview them and find out why they didn’t convert and use that information to further optimize your funnel.

 

Reduce Cost of Goods Sold & Labor

We know that revenue minus expenses are your profits. We talked about ways to increase your revenue profitably. Here’s the thing, a way for you to increase your profits exponentially is to increase your business’ revenue, while decreasing unprofitable expenses.

You want to make sure each expense that you have is producing the most possible value for your company.

Getting your business in shape is much like getting your body in shape, you want to cut the fat and build the muscle.

Let’s now take a look at how to cut the fat out of your expenses and build the muscle so that you’re getting the most bang for your business’ buck.

 

Negotiate

Negotiating some of your expenses is one of the most overlooked low hanging fruit of expense saving.  Take a look at your expenses and see who you can give a call to and negotiate your cost and terms with while still retaining great value.

Profit First Make Money in Busines

Mike Michalowicz in his book Profit First, explains that negotiating and completely cutting some expenses can dramatically increase your take home profits.

Most people don’t negotiate because of the fear of failure. This is understandable because it is a natural response. However, you cannot let your feel of failure stop you from receiving great benefits. If a person says “no” then your life hasn’t changed at all. You haven’t lost anything. However, if they say “Yes.” Then everything can change for you.

Make a habit of asking for things that you normally would not. You’ll then discover how many times when you thought people would say “no”, you will get a “yes.” This exercise will help you get in the habit of asking and negotiating more frequently.

So I say to you: Ask and it will be given to you; seek and you will find; knock and the door will be opened to you. – Jesus (Luke 11:9)

Look around and see if there are any expenses your business is paying for that simply isn’t proving any value. I did this and I saved my business thousands of dollars per year by cutting cost that weren’t producing any value for us.

Whether you’re in manufacturing, consulting, service, tech, or retail. Your company can benefit by sitting down to discover some things that your company is wasting money on.

 

Substitute Lower Cost Materials When Possible

You could be spending money on a product or service that does provide sufficient value for your business. Now you must ask, “Is there an alternative to this that will produce comparable results for my customers but cost me less?”

Be sure that you determine if the change will alter your finished product that your customer experiences. If it doesn’t then you know that it could be a great move. If it will, then you will want to consider how that will affect your relationship with your customers and if the savings of expenses is worth the affect it will have on your customers satisfaction.

 

Eliminate Product Features That Don’t Add Value

Sometimes there are things that we do for customers that don’t add value to their experience. I want you to sit back and envision your customers encounter with your product or service. Are there things within your system and process that the customer doesn’t care about and wouldn’t mind not having?

This requires study or what you are doing and why you are doing it. You will also want to ask your customers if they would be fine without having this feature and if there are any other things in your offer that they can do without. This will allow you to save time and energy by not bothering with the things that don’t add value to the customer experience. Ultimately saving your time, energy, and money.

 

Conclusion

There are so many different things you can do to increase your prices and make more money. It can be scary raising your prices, being unsure of the affect it will have on your business. I encourage you to try the things mentioned anyway. I’ve used many of them with great success and I’m so glad that I have (so is my accountant).

What are some things that have allowed you to make your business more profitable?

 


7 Replies to "3 Powerful Ways to Make Your Small Business More Profitable"

  • Ilmu Pedial
    September 8, 2016 (2:22 pm)
    Reply

    Great way. Thanks

  • Tailor Devid son
    September 26, 2016 (7:52 am)
    Reply

    Great Post! Thanks for sharing this valuable information. All this tips are very essentia.Thanx a lot!!!!!!!!!!!!

  • Entrepreneurshiply
    October 21, 2016 (9:34 pm)
    Reply

    Thanks for sharing these tips. I really like your second point – 2) Add Value That Doesn’t Exceed It’s Cost
    This, for me and my location is better than increasing prices.

    Thanks again

  • Jatin Shah
    October 27, 2016 (1:13 am)
    Reply

    This is indeed an in-depth article on this subject and who have done a great job to produce it. I enjoyed reading it, Thanks for sharing this article and have a great day

  • Steven
    October 27, 2016 (8:56 am)
    Reply

    Wow amazing… I just learn that we should make value instead of increasing our hourly rate! And its true!

  • Steven Meza
    November 3, 2016 (1:06 am)
    Reply

    Thank you for your tips on small business more profitable. These 3 ways are amazing. I have to think about implementing such a system.


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