8 Practical Tips to Increase Profit Margin in Product-Based Business
The most basic goal of every business is to make money. All businessmen and managers keep this one goal in mind and put all their efforts into achieving it. More often than not, they get so lost in that goal that they forget to consider some little things that make a major difference. There is more than one way to make more money in business – especially in product-based businesses. One most effective way is to increase the profit margin. This article has discussed what steps a product-based business should take to maximize its profit.
Look at Overall Profit
When talking about profits, you should not just look at the margin you get from each sale. Your goal should be to increase the overall profit. Many think that the price of a product is dependent on its production cost—this not the case. For example, diamonds are not as expensive as they are sold. They are not even rare.
Businessmen have controlled this market in a way that everyone has to buy a diamond ring and pay at least one full salary for it. You need to design a business model that gets you the maximum profit. Don’t lose heart if your profit on one product is not as much as you were expecting. You should see if you are getting the best of the overall profit.
Choose a Price that Sells More
You might be under the impression that a product with a high price will bring more profit. This is true if you are counting profit from the individual sale of each product. However, your business needs sales to generate enough profit to keep functioning. If your product is too expensive for your target audience, you won’t get many sales.
You might earn $100 from one product that costs $5 in production, but what good is it if you barely sold only five of them. The business will have to be shut down in the worst-case scenario. The right way is to choose a price that your audience wants. People don’t always want the lowest price. You need to maintain a brand name that people wouldn’t mind paying the price you choose.
If you can get more sales by decreasing a little percentage of the price, it would only get you higher profit and customer loyalty. You also have to make sure that your audience doesn’t think of you as a rip-off. They will go to your competitors as soon as they find one that provides the same at a better price. A moderate price that keeps customers happy and gets you proper margin will make sure that they keep returning to you every time they need this product.
Outsource Production to Asian Countries
Many companies outsource their product to Asian countries for a good reason. They get the same quality product at a significantly lower price. Most factories and contractors in Asia also deliver what you require at the fastest turnaround time without comprising anything. While many believe that countries like China don’t pay attention to labor laws and get their employees to work up to 16 hours a day without any benefits, this is not the reason why they are able to provide low prices.
There is a big difference in currency and living costs in these countries when compared to the West. They get not only cheap labor but also cheap machines and parts or ingredients. This is the reason why almost all mobile phones and laptops are manufactured in China. An average American professional in the United States earns about $4,000 a month. You can get a professional for the same task at $200 in some of the Asian countries.
The ingredients are grown and parts are manufactured in their own country at the cost of the same currency. This makes it extremely easy for them to build high-quality products at the lowest price possible that no western country can afford. You will save a significant amount of money by outsourcing your production, allowing you to sell the product at a reasonable price while maintaining great quality. The significant difference in the production cost enables you to earn much higher profits.
Pay Attention to Quality Assurance
All product-based businesses lose a portion of their profit by wasting some items. There could be defects in the product or some other issue with labor and machines that cause you to bear the cost of a lot of products that can’t be sold in the market. It becomes even a bigger problem even if one such item gets out and reaches the customer. You can save that cost and turn it into profit by setting a proper quality assurance system.
This is also one of the reasons why businesses are scared of outsourcing their work to Asian countries. They find it difficult to maintain good quality when the production is happening across many seas in a strange country. There is also a solution to this problem. There are services that offer during production check services that visit your manufacturing plants to ensure everything is done according to the SOPs. They will inspect all the products and defects and go to the bottom of the issues to resolve them. This way, you can rest assured that no one can fool you, and your business gets to increase its profit by minimizing the defective products.
Use Discounts Wisely
Every business has to offer discounts and other offers every now and then. As a businessman, you should know that these discounts are always planned. You make the customer think that it makes them happy, but there are more motives behind each sale. The company will have to face a loss in profit every time there is a discount sale, but you can make the best out of it by offering only on selected products.
You would know which products are not selling or if there is a stock soon to expire. You can either face a total loss or get rid of the stock and make some money while also saving space in the inventory. Conduct a sale and special offer discount every few months when you have to fill in the new stock or there is some other issue. By selling your product at a lower price, you will be able to save on the total losses.
Keep Your Employees Happy
Your employees are the ones that run your company. You only make decisions to properly utilize the resources you have. If you have good employees, you will see that no competitor can stand in front of you. However, no company can survive for long if its employees keep leaving the company. It takes too much time, effort, and resources to keep replacing your workers. You can avoid all these problems, simply by keeping your employees happy.
There is a mindset that you have to pay higher salaries to ensure that employees are satisfied. While you may have to invest some money, it won’t necessarily go on the salaries. No matter how much you pay, people lose motivation with time. You have to keep them motivated so they will work more and harder at the same salary you offer.
Make them feel like they are doing something great and that the company owes its success to them. They shouldn’t feel like they are your slaves and you have done them a favor by hiring them. Pay them a little higher than the market and offer benefits with respect to get them to love the company. You will see an increase in the quality and quantity of your products.
Also Read: Financial Assets Every Entrepreneur Should Perceive While Investing
Create a Simple and Effective Process
You need to create a map of the entire process of your business from placing an order for production to selling it to the consumer. See how many actors are involved and what their jobs are. Many companies increase their costs by adding unnecessary processes and tasks. This also wastes a lot of time of the company, making it difficult to work on short deadlines.
Use your experience and get someone who understands your business to scrutinize this business model. See if it can be made any simpler. Cut down the process that is not necessary. Even if there is no process you can lose, see if you can change the way they work for better results.
Invest in Machinery and Computers
The development of technology is one of the main reasons that running a business has become much easier. There is a machine or computer for almost every job today. The field of IT has further advanced with artificial intelligence, which has broken many new boundaries. Study your business model and see where you can improve.
If there is room for improvement, there must be a machine to do it for you. It may look expensive and unnecessary investment, but they help you make larger profit margins in the long run. Finding problems and replacing them with technology will reduce human labor and mistakes.