Angus Brewer Business & Tax Consultant

If you're like most business owners we meet, one of your main missions will be to maximise profits.

Normally the first thing most businesses think about when it comes to maximising profitability is getting new customers, and controlling costs. While both of those things are absolutely essential, the amazing power of your Gross Profit margin to boost profitability is so often overlooked. 

Let’s not overlook it for a second longer!  Because a seemingly small increase in your Gross Profit margin can result in a huge increase in your net profit.

In some situations a 5% increase in Gross Profit margin can result in a 50% increase in net profit! 

Sales £2,000,000   £2,000,000  
GROSS PROFIT £600,000 30% £700,000 35%
Overheads         £400,000   £400,000  
NET PROFIT £200,000   £300,000  


That's a 50% increase in net profit!

Given the importance of Gross Profit margin, here are 4 ways to increase it:

     Differentiate

Differentiate your business from your competitors, so you stop competing on price.  You need to give your customers other reasons to buy from you other than price.  Focus on what makes your products and solutions different, desirable and better than your competitors, so price isn’t the only consideration.

     Pricing, pricing, pricing

Never underestimate the power of pricing.  Pricing is so important when it comes to increasing your Gross Profit margin - to really maximise your margins, you need to price based on the value of your product.  This means you need to focus on how much your product and solution is worth for your customer, rather than how much it cost from your supplier.  

     Focus on a profitable product mix

Every business has their more profitable products, and less profitable products, so simply focussing on selling more of the higher margin products will lift your overall margin.  To do this, it’s essential that you know how profitable your product lines or groups are, so you know exactly where to focus your efforts.

     Increase your average order value

Processing lots and lots of tiny orders can sap profitability and cause delivery costs to rocket as a % of sales.  Focussing on increasing your average order value through upselling or minimum order values can help you dilute your delivery costs, and increase your Gross Profit margin.
 

In summary, Gross Profit margin is very important, and focussing on it in your business will have a profound impact on your bottom line.  Focussing on differentiating, effective pricing and pushing the higher margin product lines, will help you do just that.