A 5 % increase in operating profit margin equals a 20 % increase in profit.
Here are five concrete tips to help you improve your margins over the long-term:
1. Velocity matters. The faster your turnaround time (from order to delivery), the lower your overhead cost per unit produced. This in turn means improved profit margins. So go back to your main systems from order to delivery, how can you speed up the process? Are there steps you can eliminate? Ways to shorten parts of the process? Can you automate template, or pre-do steps? Can you script out your linkages between people and departments to speed up the process.
Remember, the faster you make the this cycle, the better your margins will be, all things being equal.
2. Up-sell and cross-sell to increase your average unit of sale. In general, when you increase the amount you sell to your customer at one time, you'll improve your margins because you'll be increasing the purchase velocity and therefore lowering your cost per sale in terms of overhead burden. So how can you increase your average unit of sale per customer? Can you up sell to richer offerings? Can you offer larger units of purchase? Can you cross sell complimentary products or services?
All of this allows you to amortize your marketing cost over a larger unit of sale which dilutes your marketing cost for each sale and hence grows your profit margin.
3. Cut low-margin clients, products, or services, and invest the saved time and money in higher-producing parts of your business. This presupposes that you have accurate and timely reporting that shows you which clients, products, or services produce what margins. Assuming that you do, review a "margin analysis" of your key products, services or customers to see which are most and least profitable.
One CPA firm we helped do this discovered that their best one-third of clients were covering their costs for their bottom third of clients who due to "scope creep" in their monthly write-up work were actually negative margin clients (i.e. these bottom third clients were costing them money every month to have them as clients!)
4. Retention, retention, retention. Attrition costs. Do all you can to keep your clients actively purchasing from you. Study the most common "drop points" in your client's purchase history. Can you strategically reinforce your business system to reduce that attrition? Perhaps you need to better communicate with them how to use your product or service? Or give them a well-timed "gift" or make a well-timed visit or phone call?
Courting your current customers eliminates or greatly reduces the acquisition or marketing cost on that second and all later transaction.
5. Watch out for scrap, spoilage, and wastage. Is it a quality issue on production? Are you poor at forecasting, and keep too much supply on hand for an order? Does it take you too long to sell your inventory and you lose part of it to obsolescence? This can also be an issue in areas of your business outside of operations, for example buying leads that your sales team can't or doesn't follow up with. Investing in marketing that doesn't work.
Reference David Finkel