Customer acquisition is expensive, especially if you’re operating in the consumer space. Many markets are saturated, competition is fierce. Thankfully, there are several ways to increase profitability without acquiring new customers, including cutting your costs or selling more products and services to existing customers. We’ll cover how to do both in this article.
What is profit?
To calculate profit, you subtract your total costs from your total revenue, but that doesn’t tell you the whole story. Breaking your expenses down by individual products and services shows more accurately where you need to cut costs. You may be paying too much for materials. Vendor contracts could be renegotiated. Could you get discounts for paying bills early? Any of these can increase your profit margin.
An important distinction here is the difference between gross profit and net profit. Gross profit, a.k.a. earnings before interest and taxes (EBIT), is not your actual profit margin. Adding the additional costs of interest and taxes—along with deductions from amortization—gives you your net profit number. That’s ultimately what you want to increase.
Revenue vs. profit
Revenue is how much money your business is bringing in. It’s important to remember that higher revenue doesn’t always equate to higher profit. If the cost to bring in new revenue is too high, it will outweigh the growth.
When exploring new growth ideas, think about the costs you’ll accrue to make them a reality. Is the upfront cost worth the long-term growth? Or will the expense of the new venture continue into the future, making potential revenue increases more costly as time goes on? Keep these things in mind as you think of ways you can increase your profit margins.
How to increase profits without acquiring new customers
There are several ways to improve your bottom line without adding any new customers. Your goal is to increase revenue or lower costs, preferably both. That starts with examining individual products and services, then taking a more holistic look at business operations to evaluate overall profitability. Here are a few ways to do that:
1. Encourage repeat customers
Customers will come back and do business with you again if you set up incentives for them. One way to do this is through a loyalty program. Getting customers to sign up also gives you the opportunity to communicate with them more frequently. You can also offer discounts. Discounts on larger orders incentivizes customers to purchase more. This will increase your revenue as well as potentially lower shipping and marketing costs
2. Launch a new offering
Keep current customers interested in what you’re doing by creating a new product or service with a high perceived value. Setting a higher initial price for a new offering is called “penetration pricing.” Electronics manufacturers and video game developers use this strategy when they launch new versions of existing products. You can reduce the price later if you like or use the higher margin to offer discounts that encourage purchases.
3. Create bundle offers
Bundling items that are selling well with products that aren’t is a good way to clear out unwanted inventory. It also increases your average revenue per customer. In some cases, this can create a renewed interest in previously unpopular items. If not, you’ll know not to reorder or manufacture those products after they sell out.
4. Find operational efficiencies
Automate where you can and eliminate any unnecessary spending. This can save you time and money, which could in turn benefit your bottom line. Think of this as the “nuts and bolts” of your operation. Adjusting to eliminate inefficiencies should be a regular practice, not a one-time event. This could help you to scale better as your revenue grows.
Save time with streamlined accounts payable tools that automate your processes.
5. Negotiate with vendors for lower prices
Paying less for supplies and materials is one of the best ways to increase your profits. Negotiate with vendors for more favorable payment terms. Talk to suppliers about reducing their prices in exchange for bulk orders. As your demand increases, you’ll be in a better position to make a new deal. Use that leverage when you reach out to vendors and suppliers.
6. Consider working with other vendors
If your suppliers are unwilling to negotiate, you may be able to find lower-cost suppliers with similar quality materials. It can’t hurt to shop around, especially if you’re able to cut costs and boost profits. When looking into a new vendor, consider how they might grow with your business. Do they provide materials to businesses of your size or larger? Are they likely to be a good partner two, five, or ten years from now? Keep these questions in mind while you search.
7. Strategically raise prices
Raising prices can be risky. You don’t want to price yourself out of the market, and current customers may respond poorly to large price increases. Research what your competitors are charging, reduce costs if you can, then strategically raise prices. Choose areas you think are most beneficial to maximize your revenue gain. Weigh each decision carefully and base it on data, not gut instinct. Let the market tell you what’s possible.
8. Remove items that aren’t selling
If bundling unpopular items doesn’t help reduce inventory, then it may be better to remove items entirely. You can use the inventory space or money you save on marketing to invest elsewhere. Talk to your accountant about taking a write-off if you donate the items. If not, chalk it up as a loss and move on.
