How to Understand and protect your Gross Profit.
There are only three ways to improve your Gross Profit
- Lower your Cost of Sales,
- Increase your prices, or
- Sell a different mix of products (i.e. sell more high margin products).
One of my favourite discussions with clients starts with this simple question “When was the last time you increased your prices?” All too often the answers are, “not for several years”, “we can’t increase or our customers will leave”, “we have never increased” or “only when our costs increase”.
Increasing prices is a normal part of doing business and can be driven by many factors. Certainly, increases in your costs should be covered, along with reviewing your competitor’s activity. Overall market conditions and simple opportunities to make more should also be reviewed regularly. Clearly, if your costs increase and you do not move your selling price, you are making less profit. See the price increase chart below.
Additionally, it is surprising that some business owners do not negotiate with their suppliers for lower Cost of Goods. Simply asking the question “what can I do to achieve a discount on your goods or services?” may reveal significant additional profit. It’s OK to negotiate.
As a business owner it is important to understand that the different products and services you offer will have different levels of profit. When this is understood a greater focus can be placed on higher profit offerings, thus changing the mix and increasing Gross Profit.
Higher Gross Profit gives a business more $$$ to pay Expenses allowing more $$$ flow to Net Profit.