6 tips to remember when improving gross profit margin
Gross profit margin is the most important factor for a businessperson to analyze his firm’s financial circumstance. It shows him how many profits he has left after subtracting the cost of goods sold.
Are you a businessman? Do you know how to increase your company’s gross profit margin?
If the answer to the latter questions is “Yes,” I believe that you have more talents in managing your business than me. But don’t worry if it’s “No” because that is why you are reading my How-to article today.
I have been running my company for more than eight years, which is enough to experience all types of the ups and downs that a business has to go through. And one of the most difficult things is to increase gross profit margin. When my company had been established for two years, troubles suddenly came all at once. Customers’ demands had changed, but I could not supply. Furthermore, the competitors appeared with a higher number and were getting stronger and stronger every day. All of those elements combined and caused my gross profit margin to sharply fall by 40 percent within two months in a row. And it kept falling in the following months. I was very confused and worried because my company had never had such a remarkable failure.
I had no idea what to do at that time; therefore, I went to business seminars to meet some experts and asked for advice. They gave me various terrific methods, so I applied almost all of them to improve my company situation. I made a massive reform, which changed everything about human resources and material facilities. I researched the market more precisely and changed the working style of the whole company. The results came after only a month of applying the methods, and the gross profit margin increased by 30%.
Until now, there were still other times that the gross profit margin decreased, but it had never fallen by more than 5% thanks to all of the experiences I gained. I know that many of you are having the same issue like I used to have. So please read on because, in this article, I will share with you how to improve gross profit margin.
What you will need to follow this article
- A pen
- A notebook
- A calculator
You may need a pen and notebook to write down what you want to apply to your company. And there will be a part which requires measurements, so prepare your calculator.
Step by step instruction
1. Increase the number of margin products
This is about distributing proportions of the budget. I realized that this was vital when attending a seminar. You need to optimize your company’s sales of the high-quality margin products and then down-sell them for customers who cannot afford to have the best. I made a huge mistake of doing the opposite, which I invested a lower amount of money on primary products and tried to sell them something better.
In order to increase the number of margin products, you need to invest in your production and human resources, which are the main criteria. Replacing the production equipment is an example. Material facilities play a crucial part in the production system. If you can maximize them, you will have the most significant number of products. Upgrading or repairing the broken equipment will affect your gross profit margin.
Moreover, if a person is well-trained, he will be able to work three times as fast as he usually does. After I had recognized that my employees were having big troubles in working skills, I put them on a train which lasted for a month. Since then, it was easier for them to work because they studied from the theories and applied them immediately. So human resources are important factors contributing to gross profit margin. Every company has a different reason why employees do not work properly as the boss expects. So does yours. Therefore, find out what the reason for your business is and fix the problem. Your gross profit margin will increase in just a short time.
2. Increase the selling price
You may say that this is difficult because you will lose customers in a second. I say that it is up to you. According to microeconomic theories, you can calculate the elasticity of demands of customers to your goods, and then consider if you should increase your selling price or not. Therefore, you can make measurements before deciding, so that your customers won’t turn their backs on you.
Moreover, your clients will only be unpleasant if everything you do is to raise the price. There are numerous methods to do it without losing them. You can raise your product’s price when you add more values to the products. To do this, research customer’s demands on your products and services in a more detailed way, so that you will know what else they need. Then set the selling price above the values. For example, when the customers buy a set of my company’s skin cream, I gave them a free day of going to one of my spas. All of my clients are satisfied with my service, and they are willing to pay.
You can also introduce your product with a smaller amount and charge a higher price for each one. For instance, you can sell a set of goods containing 60 units of profits with 120 dollars and add another product having 20 units of profits with 50 dollars. Your customers will expect a discount on the first product and pay more money for the latter. That was what I did with my products to increase gross profit margin and succeeded. Give it a try and don’t be scared.
3. Reduce costs
This seems obvious, but not many companies can do it. If you don’t want to increase your product’s selling price, you can reduce its costs.
The first thing you need to do is to analyze costs and decide which ones are necessary. The delivery cost can be one thing that you should consider because it always gets higher than its real value. This issue is easy to solve. Just find another way with lower the cost of product delivery. You can sell them online or try to negotiate with your vendors or distributors to have a more reasonable price. Another cost is labor, which you can stop selling unprofitable products to reduce it.
The cost of goods sold is another thing that you should notice. You need to reduce it to increase gross profit margin, but not to affect the selling price; otherwise, it won’t work. There are plenty ways, such as cooperating with a supplier who offers smaller price, using technology to reduce labor costs or outsourcing. You can take advantage of them to decrease as plenty costs as you can. The longer distance between your sales and cost of goods sold is, the larger amount of gross profit margin you will earn.
4. Be careful when measuring the gross profit margin
You will have numerous difficulties in enhancing something you cannot calculate. Measuring your company’s gross profit margin will help you set a reasonable goal and compare the results each month.
To do that, you need to understand the formula; and I said be careful because plenty other businesspeople are doing all wrong. The cost of goods sold and sales are the factors that affect gross profit margin, so that you need to make changes to them to increase it. This is the formula to calculate gross profit margin:
Gross profit margin = (Gross profit dollars / Selling price) %
It looks so simple, isn’t it? Nevertheless, many businesspeople are not using this formula because they misunderstand among markup percentage, gross profit margin, and gross profit dollars. So instead of using the above equation, they use markup to set their selling price. If you are using markup to calculate gross profit margin, I suggest you stop right now. The formula to calculate gross profit dollars is:
Gross profit dollars = Sales – Cost of goods sold
The formula to measure markup percentage is:
Markup Percentage = (Gross Profit Margin / Unit Cost) %
To have a deeper understanding, we can make a comparison. Let’s just say that the cost of your product is 150 dollars. If you mark it up 40 percent, your markup will be 60 dollars. The selling price that you set will be 210 dollars. Remember the gross profit dollars and markup dollars are the same, which is 60 bucks in this situation. However, your gross profit margin will be 28.6 percent.
It is a little complicated, but if you try to take time to have a deeper look, it won’t be difficult at all. Please note the differences among markup percentage, gross profit margin, and gross profit dollars to set up an appropriate goal for your company.
5. Change the marketing strategy and how you manage it
One lesson I have learned is that whenever a strategy does not work, you need to change it immediately. There is no reason to keep something that is not effective anymore. The only thing you can do is to learn from your mistakes and never make them again.
And a marketing strategy affects the sales of your product, which can easily increase or decrease your company’s gross profit margin. When you find your strategy is not useful, spend some time looking back and see if you have done these tasks:
- Set a clear goal for your marketing strategy
- Analyze and anticipate possibilities or necessary requirements of your strategy
- Identify the possible projects (the primary plan and the back-up plan)
- Evaluate and choose the best one among projects
If you have fulfilled all of these and the sales number does not increase, it means that there is something wrong in your plan. You have to recheck it and fix the problem. Most managers make a mistake of not creating a plan B, so when troubles come, they just don’t know what to do.
For example, some previous months ago, I released a new product which aimed at middle-aged women. It was a set of body lotion that helped anti-aging and softened the skin. After being released for a week, the number of products sold was not higher than 1000. I knew there was something not right, so I researched the market again and found out that the selling price was too low. It caused women to think that my company’s product is not highly qualified. As soon as I realized that, I offered them a set of body lotion with a higher price. The results were astonishing when the number increased from 1000 to more than 20.000 a week later. And my company’s gross profit margin kept rising constantly again.
Therefore, you should make notifications and be flexible when building marketing strategy to earn a higher gross profit margin for your company.
6. Pay attention to external factors
Stocks can be one of those. A higher or lower percentage of gross profit margin can be seen clearly by overvaluing closing stocks and undervaluing opening stocks. Therefore, you should do a right valuation. Although it does not directly affect your company’s gross profit margin, it is a sided elements and a fact that you should notice.
Furthermore, other competitors are also what you need to research. The more you understand about strengths and weaknesses of competitors, the more you know about your company’s advantages and disadvantages. Therefore, you will see how to differentiate your products from your competitors’. Don’t always compete on price because it is not the only factor. Ask yourself what makes your products better than your competitors? Which tasks can you do well? Which market can your product penetrate best? You will be an excellent manager if you can answer all of those questions and work well with the external factors.
Have you been enjoying my article about how to improve gross profit margin? I hope you have. These are all of the methods that I applied to increase my company’s gross profit margin, and you will be able to earn even more for your business as well if you use them.
If you have any other fantastic methods to improve gross profit margin or you have some opinions on your mind, do comment to let me know. I would love to have discussions about them. And if you like this article, please share it, so that other businesspeople can take advantage to increase their gross profit margin just like you can.
Thank you for reading my article and I hope you will find your best ways to increase your gross profit margin. Goodbye.