What is Gross Margin and how do you Increase it?
Gross profit margin is a metric that you should always be tracking. It’s key to understanding whether you’re making money, if your products/services are priced correctly and that your direct costs aren’t too high.
Your gross profit margin is the % of revenue your business makes once you’ve deducted any direct expenses. Direct expenses are any outgoings related to the production, delivery or selling of your product/service. It includes items like employee salaries, materials, equipment, supplies and transportation.
What classes as a “good” profit margin depends on your industry and
region but there are some things you can do to increase your gross
1. Increase prices
While raising prices may seem risky it could have a big impact on your gross profit margin. However, it’s important to may sure you’re demonstrating the value of your product/service when doing so or even improving it to justify the increase.
2. Reduce the direct cost of goods
While increasing prices is one solution, you can also look at reducing the amount you pay for the goods you sell as well. Have a look at which suppliers you’re spending the most at each month and try negotiating for a better deal or even switching suppliers to one that's more cost-effective.
3. Focus on high gross margin products / services
It could be time to have a look at refocusing on your product/services that generate the highest gross margin. It may mean that your sales team need to adjust their sales tactics or you need to promote different products but this can be a short or long-term way of getting you back on track.
4. Minimise waste
Identifying areas of waste and minimising these can have a big impact on your bottom line. It may be that you only have minimal waste across multiple areas, but these all add up!
- If you sell a product, are you getting multiple returns? Or are you having issues of downtime with a platform? Look into any issues with product quality, uptime or handling.
- Are you buying lots of stock that’s not selling? Or promoting services that aren’t generating leads? Cut back on areas that aren’t generating revenue for your business.