Increase your profitability

1. Why profitability is important

Businesses generate profit when their income is greater than their costs. The more efficiently a business can do this, the more profitable it will be. This is key to success, as even businesses with a high turnover and a large number of sales can fail if they are not profitable. 

To maximise profitability, businesses need to:

• understand current performance 

• optimise revenue through pricing and volume of sales

• minimise costs and waste

• improve efficiency and productivity.

2. Defining profit margins

Profit margins are measures of how profitable your business is, and are expressed as a percentage. The main measures are:

• gross profit margin - how much money you make after all direct expenses - the costs of making and selling your goods (cost of goods sold) - are deducted

• operating margin - how much money you make after deducting the costs of goods sold and other overheads such as premises, admin staff, insurance and professional fees, except interest and tax, and is also known as the EBIT (earnings before interest and taxes) margin

• net profit margin - how much money you make after deducting all costs, including direct expenses, operating costs and interest and tax payments and is sometimes referred to as “the bottom line”.

Your size, sector and product or service offering will influence whether profit margins indicate a good performance, so it can be useful to benchmark against others to understand what is typical for your type of business.

3. Retain and attract profitable customers

Understand customer profitability

Often the Pareto principle applies - otherwise known as the 80/20 rule - where around 80 per cent of your profit is gained from around 20 per cent of your customers. Build a profile of these customers so you can better understand, identify and communicate with them.

• Are they in a similar location?

• Do they share similar demographics? 

• Do they share the same reasons for buying from you? 

Focussing on your most profitable customers - even if it means letting the less profitable ones go - could boost your margins, provided it is handled carefully.

Encourage repeat custom from profitable customers as this is usually less expensive than acquiring new customers, so consider:

• loyalty schemes

• personalised communications

• strong customer service

• cross-selling other products they may be interested in.

Look at key performance indicators such as customers’ lifetime value, average order value, and return rate to determine how much you can spend on retaining and attracting more of these customers, and still maintain and ideally increase profits.

Monitor sales and marketing channels

Measure your marketing activity to identify which channels generate the most sales for the lowest cost - in other words, have a strong return on investment (ROI). Also look at which channels attract your most profitable customers.

Remember though, that you need to look at your marketing mix as a whole to understand how it works together. Sometimes cutting out whole channels can negatively impact sales. For example if your pay-per-click ads have the highest ROI, and you cut your other marketing channels to focus all spend on PPC, you may find that your volume of sales go down, if other marketing activity was generating the demand that drove the Google search volumes in the first place. 

4. Analyse products and services

Look closely at your existing business activity to identify which areas are most profitable and why. Make sure you identify all your direct and indirect costs. 

If some products or services are more profitable than others, look at any insights which can be transferred to your other products or services to improve their margins. Assess whether you can cut waste at any stages of the process and lower the costs of your materials. Check whether you can adapt your production processes so they are more streamlined, for example using fewer working hours or resources to cut labour costs.

Also consider whether you can sell more of these products while maintaining their profit margin. Can you cost effectively service a new market? Could you alter packaging or messaging to widen their appeal or meet other similar needs - for example if your most profitable product is a car vacuum, could this be marketed for sofas as well?

5. Manage your costs

Careful cost management can be key to increasing your profitability. Most businesses can find and cut some wastage. 

Regularly review costs in all the main areas of your business.

• Energy use. Reduce energy costs by adopting energy efficiency practices, monitoring usage, and reducing any obvious waste with heating and lighting where possible.

• Outsourcing vs in-house resource. Changing business needs will impact whether it is more cost-effective to outsource or bring tasks in-house.

• Finance. Check your loans and overdrafts to ensure you are on the most suitable deals, and explore whether assets increasing in value can lower loan to value ratios.

• Transaction fees. Keep an eye on what you are being charged by merchants and your bank to process card payments and cash deposits.

• Subscriptions, memberships and licences. Cancel unused or low-value subscriptions, finding free options or reducing licences to lower fees.

• Review suppliers. Actively manage your suppliers to ensure you are getting the best deal. Consider whether you could negotiate better terms, change supplier, or make purchases on a 'just in time' basis to make more effective use of your working capital. 

• Premises. Examine whether you are getting the most out of your space, or if there are any ways you can more effectively use it, for example could you sublet some unused space?

It’s important to understand the implications of any cuts so they do not become false economies and disproportionately reduce the quality of your products and services, negatively impact your sales pipeline or expose you to unnecessary risks.

Read more about how to cut your operating costs.

6. Look at your pricing

It's a good idea to regularly review the market and competitors to assess and benchmark your pricing. If your production costs have increased, it may squeeze your profit margins and you may need to look at increasing your prices - either across the board or on select products or services. 

If you are delivering a service, such as consultancy or design, carefully monitor your actual activity against your original estimate and use that to inform future estimates and build in contingency. 

Changes in your marketplace may mean that you can raise your prices without risking sales. However changes to pricing should only be done as a considered strategy and in response to business need. Consider customer perception and demand, competitor prices, your business costs and goals. Any pricing changes should be communicated clearly and transparently, and customer satisfaction levels monitored.

Read more about pricing products and services.

7. Improve efficiency and productivity

You can boost profitability by streamlining internal operations to simplify how work gets done and reduce wasted time. It’s important to measure your operational efficiency on an ongoing basis, and put systems and processes in place that will help you to get the most from your resources.

For service businesses, timesheets can be used to understand what activities take up the most staff hours and whether this is profitable. In a cafe, the time taken to make food or drinks could be improved by changing layout, or wastage could be cut by implementing better training. Work with your staff and see where they feel inefficiencies or difficulties lie.

Improve productivity by focusing time and resources on the activities that generate the most profit or value such as delivering profitable products or services and reducing time spent on low-value tasks. Also ensure that you are making the best use of staff skills, with staff working on the tasks that best suit their abilities. Cut unnecessary meetings and calls to focus time on productive work.

8. Consider technology

Careful adoption of IT can help improve your profitability by reducing risk and costs as well as streamlining processes. 

Reduce risk, costs and admin time 

• IT can help you work more cost effectively and manage some business risks preventing avoidable losses of data etc that could wipe out profitability.

• Software for online accounting and appointment scheduling can replace manual tasks.

• AI tools such as Copilot and Magic Notes can automate routine office tasks and tools like ChatGPT can help with creating marketing content to save time.

Make informed decisions

Technology can also help to increase revenue by helping you make more informed decisions. 

• Tools such as customer relationship management systems can improve customer service and retention, while data analytics and BI tools can help identify profitable activities and give valuable insight. 

• AI tools can also support better forecasting and identify inefficiencies, helping businesses find ways of working more profitably. 

As with any tool, it is essential that you do your research to find the best options and suppliers to meet your needs, and ensure that you adhere to all applicable regulations and legal requirements, including data protection and GDPR.

9. Measure your efforts

Ensure you regularly measure your profit margins and assess your business performance to determine whether your tactics are actually increasing your bottom line.