Strategies to improve sales and profitability

To increase the profitability of your business, you need to understand two key concepts: profit margins and profit drivers.

Profit drivers are factors that affect your bottom line. They can be:

• financial, such as the price of goods, sales volume, or inventory
• non-financial, such as productivity, market share, customer satisfaction, etc

Understanding these factors and how they relate to your profit margin can help you to develop strategies to improve your profits, increase sales revenue and reduce your costs.

Work out your profit margin

Gross profit is the money you have after you deduct the cost of making and selling your product. The formula is simple: sales revenue - costs of goods sold = gross profit.

For example, if your business' revenue is £300,000 and the cost of goods sold is £100,000 - this leaves you a gross profit of £200,000.

To work out your gross profit margin, you divide your gross profit with the sales revenue. Then multiply by 100 to express this margin as a percentage. Using the example above, you would get a profit margin of 60 per cent.

To work out your gross profit margin percentage, you can use the following formula:
(gross profit ÷ sales revenue) x 100 = gross profit margin percentage.

To calculate net profit, deduct from gross profit all other business operating expenses, such as interest and tax.

Is profit margin important?

Yes. Profit margin gives you valuable information about the financial health of your business. You can use profit margin to:

Assess your business' current performance

If your profit margins are stable, your business is likely running well. However, decreasing margins could indicate problems and issues around pricing, sales, costs, etc. You may also use profit margins to benchmark your performance against other businesses in your sector or industry.

Manage your costs

Rising costs will show in your profit margin. You may want to find ways to reduce waste, manage your resources and deal with hidden costs. See how to reduce business costs to increase profits.

Increase efficiency

Productivity can help improve profit margins. Staff are a big expenditure for most businesses. Helping them become more effective means you'll get more output for your money. See how to improve productivity to increase profits.

Review your sales processes

If your margins are small, you may want to consider which customers are the most profitable to your business. This may help you effectively target the most profitable customers that are likely to buy more from you. You may also want to look at your product lines - for example, stop selling products that eat into your profit margin and concentrate more on your successful lines.

Identify new business opportunities

If your margins suggest that certain products or customers are more profitable, you may want to look for opportunities to sell more to or sell complementary products to profitable customers. You could also enter new markets to increase profits.

Using some or all of these strategies could help to increase your profit margins. You should include these measures when preparing a business plan for growth.

You can improve your profit margins by carefully managing costs. You can find ways to use resources better, but remember not to cut business costs at the expense of the quality you deliver.

What are the different types of business costs?

Cost accounting focuses on several different types of business costs:

• direct costs - such as wages and materials
• indirect costs - such as reconciling bank statements
• operating costs - such as production, overheads or other day-to-day activities

Costs can also be:

• fixed - eg office expenses, rates and utilities, business insurances, loan repayments, etc
• variable - eg sales commissions, packaging costs, freight costs, etc

Some costs, eg labour and materials could be variable or fixed depending on the circumstances of your business. Both types of costs can affect the profitability of your company.

How can I cut costs to maximise my profit?

The main business cost areas you should consider are:

• Suppliers - always try to get the best deal from suppliers. You can try negotiating terms with your current supplier or finding a new one. You may be able to get better deals with economies of scale. Alternatively, buying on a 'just in time' basis could be a better use of working capital. See choosing the right suppliers.
• Finance - review the financial services you use - make sure you are getting the most competitive deal available. Ensure you are using any overdrafts or loans effectively. See cashflow management.
• Premises - decide if you are making the most of the space you have available. You may be able to sublet unused space. Read about choosing business property.
• Production - you may be able to reduce business waste and cut the cost of your materials. You can try to streamline production processes, decrease your inventory or reduce working hours to lower costs. Find out about process and resource efficiency.

Activity-based costing

You can use activity-based costing to uncover the real cost of specific business functions. Activity-based costing shows you how much it costs you to carry out a specific business activity by attributing proportions of all your costs - such as salaries, premises or raw materials - to specific activities.

It can take some time to carry out the initial analysis of activity-based costing, but it can often reveal costs and potential savings that you would not normally discover using other costing methods.

Your sales revenue can be a key profit driver in your business. To increase your profitability, you should develop a strategy to grow your sales. You can look at things like:

• increasing your prices
• finding new customers
• selling more to existing customers
• offering sale promotions to boost the volume of sales
• developing new product or service lines
• selling in new markets

You should examine the products and services you offer, your target market and your pricing strategy to see if you can make improvements.

Review your product or service pricing

It's a good idea to review your prices often. Changes in your marketplace could mean that you can increase prices without losing sales. However, you should test any price rises before you make them permanent. See how to price your product or service.

Target the right customers

It's not just your prices that affect your profits - the type of customers you're selling to can have a big impact. You may be able to increase your profit margins by targeting your most profitable customers, even if you lose the less profitable ones. To find out the most profitable customers, you can apply the Pareto principle.

Often known as the 80/20 rule, the Pareto principle proposes that around 80 per cent of your profit is gained from 20 per cent of your products or services. Similarly, 80 per cent of profit is often also gained from 20 per cent of customers. 

Review your product and service offering

If you offer a range of products and services, examine the profit margins of each. You can work out what individual products cost by you using activity-based costing.

When you look at your current offering, you may find that some products do not deliver good returns. Consider concentrating your efforts on your more profitable offerings.

Carry out regular market research to identify products and services that are in demand. Keep up to date with market trends, as this will help you to identify new opportunities to generate profits.

Targeting your most profitable customers is a common strategy for increasing sales revenue. Some customers will contribute more to your profit margin than others. The key is to identify those customers early and adapt your sales strategy accordingly. For example, you may want to:

• set higher sales targets for your best customers
• find similar products or services to sell them
• find similar customers to sell to

Identify your most profitable customers

You can use different measurements to identify your business' most profitable customers. For example, you can analyse your previous sales to find out who they are. Take note of what they buy, and when they buy it.

You can then segment your customers and the products or services they buy into one of four categories:

• high sales and high profit
• high sales and low profit
• low sales and high profit
• low sales and low profit

It's a good idea to focus on customers that provide high sales and high profit. However, customers that provide high profit on low sales can also help boost profits.

If customers are providing low profit from high sales, you should think about adjusting the price of your product or service to see if you can generate more revenue from these sales.

It may not be worth focusing any efforts on customers who generate low sales and low profits.

Methods for selling more to your best customers

You can try the following ways to sell more to your best customers:

• up-selling - selling them premium products with higher profit margins
• cross-selling - offering complementary products to those already sold
• diversifying - identifying a need and developing new products/services to meet them

Find new profitable customers

You can try to expand your customer base by targeting new customers who fit a similar profile to your existing best customers. Use market research and market reports to gain knowledge about your marketplace, your customers and their behaviour to target them better.

Businesses that run strong and efficient supply chains tend to generate more revenue and higher profits. To increase profitability through supply chain management, you can look at several different areas, including:

• inventory management - eg finding the balance between too much/not enough stock
• supply and pay agreements - eg automating processes, such as order placement, etc
• control of operating expenses - eg preventing incorrect orders, distribution errors, etc
• settlement of payments - eg solving late payments, invoicing missing payments, etc

To make the most of your supply chain, don't focus solely on logistics. Consider where the cash goes within the processes and identify areas where you may be able to generate savings.

Impact of purchasing on profitability

Efficient and effective purchasing can be the first step towards improving your profitability. You should:

• Review your supply chain arrangements often and see if you can buy the same raw materials more cheaply or efficiently elsewhere. However, be careful not to reduce the quality of your product or service for the sake of cutting costs.
• Analyse your supply chain expenditure to find out where you spend the most money and where it may be possible to cut costs and achieve savings.
• Shop around to find the best deal. Once you know what your biggest costs are, negotiate with your suppliers and ask if you can get a discount for early payment.

Try to get a better price by negotiating long-term contracts with suppliers. You could benefit from economies of scale by buying as part of a consortium. If you can't reach an agreement for a better deal, consider switching to other suppliers.

Multiple suppliers vs single suppliers

There are arguments for and against choosing a single supplier for your business. Using too many different suppliers is more time-consuming and gives you less leverage to negotiate. However, dealing with only one or two suppliers can cause problems if things go wrong.

Contracting two or more suppliers for the same service may typically provide advantages in terms of:

• flexibility in the choice of sourcing solutions
• adapting to the changing circumstances
• greater protection against risks
• ability to make better contingency plans
• finding the best value for money

Read about choosing the right suppliers.

If you can't grow within your original market, expanding into new markets could boost your revenue and increase the profitability of your business. However, you should not take the decision to expand lightly.

Introducing a new product to market, or going into an entirely new market, both carry certain risks. You will need to consider those risks carefully when determining market profitability.

What is market profitability?

Market profitability takes account of the financial factors that affect your ability to make profits. These may be:

• the level of interest in your product
• the ability of customers, buyers or suppliers in the market to influence your business
• barriers to entry, such as government restrictions or limited distribution
• the potential of substitute products to affect the demand for your goods
• competition and rivalry in the market

If your market analysis shows poor market profitability, you may want to look at other ways of boosting your margins. To help you with market analysis, you can use different types of strategic planning models.

Importance of market research

It's important to thoroughly research potential opportunities before you start. You may be able to tailor or adapt existing products or services for new markets. This can provide new income with minimal costs and can easily boost profits. For example, if you produce tools for the garden market, are there any potential applications for the tools in the construction industry?

When researching your market, you need to clearly understand:

• who your potential new customers are
• why, when and how they will buy the product or service
• how much they will pay for it

See more on market research and market reports.

Expanding into new territories

You may be able to sell your existing products and services into export markets. Exporting can extend your market, boost your turnover and minimise reliance on local customers. Find guidance on preparing to export and support for exporting.

New product and service development

If you're developing a new product or service for a new market, you must be sure that it's feasible for you to do so. Consider the following:

• Do you have the skills and expertise internally or will you need to outsource?
• Have you got the commitment and resources available to make the new project work?
• Can you minimise the risk of a new venture?
• Are you sure there's a demand for the new product or service at a profitable price?

Find out how to research and develop ideas, new products and services.

Productivity and quality of your products and services can greatly affect the profitability of your business. You can improve your profitability by getting the most from your existing resources.

The relationship between productivity and profitability

Productivity is a measure that takes into account the amount of input (eg manpower or material) needed to produce an output (eg the final product or service). If you use fewer resources to achieve more output, you will typically have high productivity.

Profitability is the revenue left over after all expenses and taxes have been paid. You can increase your profitability by producing more products while paying less for the resources needed to produce and sell them.

How does productivity affect profitability?

Productivity can affect profitability when, for example:

• you don't produce as many goods as projected
• the cost of raw material exceeds your cost budget
• the cost of labour is higher than expected

Many factors can affect productivity, including external conditions such as a supplier going bust, or an increase in the costs of raw materials. Internally, management decisions around resource allocation, budgeting and procedures are most likely to impact productivity.

Measure productivity for profit

You should regularly monitor productivity and measure the efficiency of your operations to get the most from your resources.

For example, you could monitor how many employee hours it takes to perform specific tasks or provide services. If the time increases, it may indicate inefficiency. Addressing the problem quickly will benefit your profitability.

Leadership is an important part of managing productivity successfully. Motivate staff by communicating your productivity targets and how you are going to measure them. Incentives can also help motivate staff to meet productivity targets. Make sure you define the targets carefully so that production speeds don't increase at the expense of quality.

Use KPIs to measure productivity

Use the key performance indicators (KPIs) that are most appropriate for your business. Your KPIs should:

• reflect your goals
• be measurable and comparable
• allow for corrective action if things go wrong

See how to measure performance and set targets.

Compare your business with others

It's useful to understand how similar businesses approach the same issues. This comparison is known as benchmarking. Benchmarking can be:

• on a basic, like-for-like level - such as comparing energy costs between similar businesses
• more detailed, such as sharing data and analysing production and stockholding patterns with other businesses you trust

See more on benchmarking your business performance.

Streamline your processes

Regularly consider if there are more efficient ways to reach your goals. For example, you may always produce a particular type of product at a specific time in the month, but would it ease your cashflow if you produced, shipped and invoiced it earlier, or later, in the month?

See how to increase efficiency to maximise your profit.

Improving profitability isn't just a matter of focusing on it for a short time and then letting it look after itself. It's important to consistently focus on profitability across all areas of your business.

Regularly manage your profitability

You need to routinely review your profitability, assessing all the key areas including:

• purchasing
• sales and marketing strategy
• production and delivery processes

Build these reviews into your day-to-day business processes wherever possible. For example, encourage sales teams to focus on the profitability of sales, rather than just turnover. You could also reward production staff for suggesting more efficient ways of doing things.

Periodically, you will need to step back and re-examine the profitability of your business.

Watch market trends

Stay aware of trends in your market - they will have an impact on your profitability. Changes in the market can present new opportunities for business. You can capitalise on market trends and competitor intelligence by watching them carefully and adapting accordingly. 

Use benchmarking and SWOT analysis to inform your profit strategy

Benchmarking shows you how you are performing against comparable businesses. If you routinely benchmark, you will get new perspectives on where you can make improvements. 

Regularly carrying out SWOT, PESTLE and other models for strategic analysis will help you to manage your strengths, weaknesses, opportunities and threats as they change. This gives you the best chance to respond to changes before your competitors do, thereby protecting and growing your profit.

By reducing costs and increasing turnover and productivity you can improve your business' profitability. Healthy profit margins can make it easier to plan for change and growth. Try some of these key ways to increase your business' profitability:

1. Identify areas in your business that you could improve or make more efficient - eg production or administration. Read about process and resource efficiency.


2. Use key performance indicators (KPIs) to discover your weaknesses and problem areas, such as rising costs or falling sales, and address these. See how to measure performance and set targets.


3. Find ways to reduce your business waste - this can cut the costs of sending waste to landfill. You could also look at reducing your use of raw materials, or recovering energy from waste. Discover how you can reduce your business waste to save money.


4. Regularly review how you price your products, and test new prices before making them permanent. See how to price your product or service.


5. Group your customers into sales categories based on the volume of sales and profits generated - and adjust your pricing and marketing efforts accordingly.


6. Sell more to your most profitable customers. Use up-selling, cross-selling and diversifying techniques to improve your profit margins. See how to target your most profitable customers.


7. Negotiate better deals with your suppliers - for example, long-term deals might offer better value for money or, if you're ordering supplies in bulk, you might be able to get a discount. Read about choosing the right suppliers.


8. Look out for new business opportunities and chances to expand into new markets. Research potential new customers and how to target them. See how to enter new markets to increase profits.


9. Routinely measure the efficiency of your operations and put monitoring systems and processes in place - eg benchmarking.


10. Streamline all business processes where possible. Find out about process efficiency to cut waste.