How to Increase Profitability
Mark Hess shares a valuable article that explains how to increase profitability.
With the economy slowing, many companies will shift their focus to improving their profitability. Is your management team prepared to take a fresh look at how to grow profit margins? In our work with mid-market companies over the last decade, we have helped uncover many different ways to improve profits. Here are our Top 5 approaches to improving your profitability, with two bonus tips for good measure.
1) Do you really understand the economics of your business?
It’s vital that the right metrics are used to measure profitability. An example: when working with one client that sold direct to customers and also sold through distributors, we realized the way our client defined their profit margin led to an incorrect view of the economics of direct vs distributor customers. Because this client defined profit margin from net revenue (after large customer discounts) instead of gross revenue, the discounts didn’t factor into the calculation—so this client fooled themselves into believing that the customers who purchased through the distributor were more profitable than they really were. Defining financial metrics so that they are meaningful and lead to good business decisions is critical for making decisions that can improve the bottom line.
Realizing the true economics of a business—by using the correct, properly defined metrics—thoroughly changed this client’s understanding of what a “good customer” looks like and, in turn, helped maximize profits going forward. In effect, this client doubled sales when they shifted their focus to selling direct when possible.
This particular client’s experience shows how vital it is to have a clear understanding of each individual component of the bottom line. Without a clear view of each component, it’s difficult to make decisions on how to move forward.
2) When was the last time you reviewed the structure of your pricing?
Be sure to review and refine your pricing strategies every couple of years. Not regularly refreshing your view of pricing leads to not charging appropriately. What happens all too often is that a particular situation leads to offering a price adjustment, then that adjustment becomes the norm. This results in a pattern of not looking at all customers in the same way and then offering customers discounts that are not warranted.
Key points include:
- Legacy IT systems
- Internal benchmarking
- Procurement processes review
Read the full article, 5 Approaches to Profitability, on Maven-Associates.com.