There are only 3 ways to grow profits: increase prices, reduce costs, or add additional profitable sales revenue. These may seem simple, but it is amazing how many owners misunderstand the dynamics of profit growth. Products and services are often underpriced due to fear and unfamiliarity of the concept. The multiplier effect of adding a few percentage points to the sales price or reducing costs by a few percentage points can add substantial profit dollars to the bottom line. Additional sales can also help but they must be profitable.
Increased prices – A small price increase of 3-8% can often be implemented with little to no customer resistance. This is especially true for products or services used infrequently. Customers rarely remember what they paid six months or 2 years ago. You need to provide the same level of quality and service. This is what carries the day when getting customers to buy from you.
Cost reductions – In a similar vein to the above, a 3-8% reduction in costs can have substantial impact to the bottom line. A small price reduction in material purchases can often be obtained by volume ordering, or consolidating volume with fewer vendors. Efficiency in delivering your product or service can also reduce cost. Are work volume standards established and monitored? Can two people accomplish the same output as three?
Adding 5% to your price and reducing 5% in your direct costs can add 10% on each customer transaction. If your sales are $100,000 per month, these actions will add $10,000 monthly to the bottom line!
Additional sales is the third way to add profit. See the sales growth section for ideas.