How to make your business more profitable
Q: How can I make my business more profitable next year?
A:
I want to take the opportunity to talk about a lesser known, yet preventable problem in business: sometimes growing your product/service base too quickly can be detrimental to your profitability.
Why does this happen?
Well, your customers are so important to you, and you work hard to solve all their problems. Inevitably, as your business and customer base grows, so will the number of products you offer - because you genuinely want to service them every way you can.
At the same time, small businesses are often low-resourced, so balancing a wide array of products with a small team can get tricky. Before you know it, you may have 10-20 products to meet everyone’s needs and budget.
If this sounds like your business, I would encourage you to take a step back and take a holistic view of all your products and how they might be affecting your overall profitability. The end of the year is a great time to review your line of products, and strategize for the coming year(s).
Here are some questions that can help you dig a little deeper:
What is the profit margin* earned on each offering?
What is the total gross profit** each offering contributes to your bottom line?
Which offerings are the lowest in question 1 and question 2? Would it make sense to discontinue any of those? What kind of resources would it free up if you discontinued any low performing offerings?
Are you holding on to any sacred cows, perhaps, unnecessarily?
*Profit margin = (until sales price - unit direct costs) / unit sales price
** Total gross profit = total annual volume x (unit sales price - unit direct costs)