When it comes to turning a profit, many business owners make the mistake of assuming that charging a premium price is the only way they can increase their profit margins. While low prices can certainly be a problem, raising your prices too high can cause sales to decline, leaving you with similar issues to what you were facing before.
Fortunately, adjusting your prices is far from the only way you can build a profitable business. By doing some extra digging on the back-end, you can increase profits without pricing your products or services out of reach of the average customer.
1. Focus On Customer Retention And Repeat Sales
One of the most-repeated adages in the business world is that it is much easier to keep an existing customer than to try to onboard a new one. It’s also a lot cheaper. Some estimates conclude that it can be five to 25 times more expensive to acquire new customers. At the same time, increasing retention rates by a mere five percent can boost revenue by 25% – 95%.
Retained customers can become extremely loyal, buying from your brand repeatedly and even referring others to your business. They can easily become a meaningful source of growth, particularly if you use tools like email lists to keep in touch and give customers a reason to come back for more.
Writing for HubSpot, Sophia Bernazzani notes that learning from customer feedback can be especially vital for improving retention rates. “You can’t improve customer retention without first understanding why customers leave your company. Once you know the reasons and the correlating signs, you can work to prevent customer churn by proactively dealing with issues. […] Being able to identify and address these issues as early as possible will help you to prevent customers from leaving you in the first place.”
MORE FOR YOU
2. Reevaluate Supplier Costs And Other Expenses
Your company’s overhead can have a surprising impact on your profitability. A large number of ongoing costs can make business expenses become impossible to manage. From the amount of money you pay your vendors to the amount you spend on utilities each month, every piece of business overhead should be carefully tracked so you can identify opportunities for improvement.
Michael Campbell, co-founder of modern prescription glasses brand, Hip Optical. Campbell explained, “When we were first starting our business, we discovered that most of the optical industry was controlled by a single company. With everyone essentially using the same supplier and models, it was no wonder that high-end glasses were selling at ridiculous prices.“
Continued Campbell, “To combat the monopoly, we opened our own lab to manufacture prescription lenses. Because we handle our own manufacturing, we’re able to reduce cost and offer premium prescription glasses for a fraction of the cost — all shipped directly to the consumer.”
Many businesses also fail to fully account for financial emergencies, as well as expenses that are paid on a less frequent basis, such as taxes or insurance. These can create a significant cash flow crunch when you aren’t proactively planning for them.
Take a step back and critically evaluate your current expenses. You could negotiate with suppliers to obtain bulk discounts. You could save money by having your team work remotely instead of in an office. Even seemingly small steps can make a big difference over time.
3. Don’t Focus On Sales And Discounts
In an effort to pump up their sales volumes, struggling brands will frequently slash prices or offer huge discounts to their customers. While this may work for large retailers, it can actually backfire for smaller brands because they’re ultimately left with less money to cover ongoing expenses.
Writing for IgniteSpot, Tami Brehse explains that frequently discounting products can also negatively affect how customers perceive your brand, causing them to view it as a bargain item that is worth less than it actually is.
“When you give discounts, you attract bargain hunters. When you price your product at what it’s worth and politely decline to take anything less, you attract customers who want and can afford to pay it. The final reason you shouldn’t offer discounts is because it leads to a feeling of inconsistency with your pricing. […] You don’t want customers holding out on buying from you because they think they’ll eventually get it cheaper.”
While discounts can lead to a temporary boost in sales volume, they’re more likely to hurt your sales volume — and profit margin — in the long run. Aside from rewarding your most loyal customers (think back to retention marketing), discounts should rarely, if ever, be used.
When you work on your pricing strategy, reduce costs and increase sales, you’ll be able to see a dramatic increase in your profit margins, without needing to charge your customers extra. After all, maintaining competitive pricing can be just as important for your long-term success in the market.
By making a price increase your last resort for increasing profits, you’ll gain a distinct competitive advantage that helps you stand out in a crowded online marketplace.