The difference between thriving and merely surviving often hinges on a company's profit margins. Understanding how to work out profit margin is a critical component of financial management. Better profit margins make the company scale and grow.
While the general answer to how to improve profit margins seems like reducing costs, increasing your prices will bring the real difference. McKinsey & Company states that,
“On average, a 1 percent price increase translates into an 8.7 percent increase in operating profits.“
This change was seen without altering any of the cost or the other variables. This is the power pricing has to maximize profits. A business with a sustainable pricing process that changes prices on time to optimise sales and profits from the transaction increases its chances to scale quickly and efficiently.
In this blog, we'll explore actionable strategies and modern solutions like AI pricing benefits that can help businesses enhance their financial health.
Understanding the Basics: Gross and Net Profit Margins
Before delving into improvement strategies, it's imperative to know how to calculate gross profit margin and how to calculate the net profit margin. The gross profit margin reflects the difference between sales and the cost of goods sold, offering a view of how efficiently a company is producing its goods. On the other hand, the net profit margin takes into account all expenses, taxes, and interest, providing a more comprehensive picture of a company's profitability.
The formula to calculate the Net Profit Margins:
Revenue - Cost / Revenue
The formula to calculate Gross Profit Margin:
Revenue - Cost of Goods Sold / Revenue X 100
7 Strategic Ways How to Work Out Profit Margins
In a business, there are a select few ways on how to work out profit margins. From cutting costs to seeking more efficient ways to conduct your entire operation, companies tend to use different strategies to increase their profit margins. However, one powerful way is to focus your operation towards pricing optimally: this includes timely pricing based on not just the market conditions but also the macroeconomic conditions of a region and more.
Retailers, E-commerce brands, manufacturing and many other industries are relying on such pricing systems to manage their large product portfolios. Pricing Intelligence for Retailers has helped many businesses optimise prices promptly without having to manually analyse markets every time there is a change. Let’s look at the other ways first along with their benefits and then see how efficient, number 7, pricing optimisation helps in improving profit margins.
1. How to Increase Profit Margin through Cost Control
Cost reduction is a traditional approach to how to improve profit margin. Scrutinising expenses and streamlining operations can free up capital that directly enhances the bottom line. However, it's crucial to cut costs intelligently to avoid impacting the quality of products or services.
2. How to Increase Profits with Value Addition
Adding value to products or services can justify price increases. Whether it’s through superior quality, additional features, or enhanced customer service, customers are often willing to pay more for perceived value, which is key in how to increase profitability.
3. Maximize Profit through Diversification
Diversification can spread risk and open new revenue streams. By exploring new markets or adding to the product line, companies can tap into additional customer bases and maximize profit.
4. Streamlining Operations for Enhanced Efficiency
Efficiency is the backbone of how to increase profit margin. By optimising operations, businesses can reduce waste, improve turnaround times, and increase productivity, which, in turn, contributes to a healthier profit margin.
5. The Human Factor: Invest in Your Team
Investing in training and development can lead to a more skilled, efficient, and innovative workforce. Employees who feel valued are more likely to contribute to the company's success, ultimately leading to improved profit margins.
6. Customer-Centric Approaches to Increase Profitability
Understanding and promptly responding to customer needs can lead to repeat business and referrals, which is vital in how to increase profitability. A loyal customer base is more price-tolerant, allowing businesses to maintain healthy margins.
However, this can serve as a part of contributing to your profitability journey. To revamp your profit margins effectively and in a more sustainable way, pricing management is the way to go, as discussed in the next point.
7. Focus on your Price Management to Maximize Profits
As mentioned in the introduction, simply increasing the price can change a significant portion of profits. Such a shift is not so easy to bring by altering the other variables like cost, investing more in team building or training, and so on.
Other variables may lead to increased profits but are not sustainable and not as effective as price optimisation.
Download Whitepaper: The Ultimate Guide to the Perfect Pricing Strategy
Price Optimisation: The Role of AI and Machine Learning
Traditional methods of optimising prices can cost you much more time, resources and the opportunity to scale your business. ERP Systems, Excel sheets, and the like limit the expansion you can get with AI-powered pricing tools. ERP vs Integrated Pricing Management is a great debate when it comes to pricing and smart businesses with a long-term goal in mind to scale, always choose a sustainable option.
Innovations in technology have ushered in the era of dynamic pricing machine learning algorithms, which are a game-changer for businesses. The role of Machine Learning in revolutionising pricing and profitability is growing and being adopted by multiple companies for a sustainable pricing process. The benefits of AI pricing include the ability to analyse massive datasets, comprehend market dynamics in real-time, and adjust prices strategically to maximize profit.
Also Read: How do AI Pricing Algorithm Work?
AI Pricing Benefits – Beyond Just Numbers
The benefits of AI pricing extend beyond simple calculations. By incorporating AI, companies can forecast demand, adjust to market conditions, and set prices that not only improve profit margins but also ensure customer satisfaction.
The Price Engine of a pricing software analyses market conditions, position, and product nature to find optimal price recommendations across various marketplaces for optimal revenue and profits.
Dynamic Pricing Machine Learning – A Step Further
Dynamic pricing machine learning models take into account numerous factors like consumer behaviour, competitor pricing, and inventory levels. They can adapt to changing conditions, ensuring businesses stay ahead of the curve and maximise revenue.
Download Whitepaper: A Comprehensive Guide on the Top 10 Smart Pricing Tools
Conclusion: The Path to Better Profit Margins
Improving profit margins is not about quick fixes but strategic adjustments and the adoption of advanced technologies. By knowing how to calculate and how to improve profit margin, businesses can make informed decisions that lead to sustainable growth.
Embracing AI pricing and machine learning models can significantly contribute to a business's ability to adapt prices dynamically and respond to market shifts, ensuring the maximisation of profit margins.
In the end, the journey of how to increase profits is ongoing, requiring continuous learning and adaptation. But with the right approach and tools, businesses can thrive, achieving not just better margins but also long-term success and resilience in an ever-evolving marketplace.
Do you want a free demo to try how SYMSON can help your business with margin improvement or pricing management? Do you want to learn more? Schedule a call with a consultant and book a 20 minute brainstorm session!
