How your small businesses can be more profitable
A small business owner's guide to taking your business to the next level
If there’s one thing that all small business owners have in common, it’s a desire to be more profitable.
But while the path to more profit might seem straight-forward – simply sell more products – the reality is much more nuanced.
Pricing strategy, marketing costs and average order value are just some of the factors that can influence profitability. The trick is knowing which levers to pull - and when.
Identifying ways to grow profit
For Nicole Banning, the founder of swimwear brand Ephemera, “tweaking a few levers” saw profits surge in 2020.
“It was never something I would have done it if not for Covid-19,” admits Banning, saying that the looming pandemic forced her to re-examine her entire business model. “At the time, we had no idea if wholesalers would be buying in the coming season. We didn’t know if people would be buying swimwear at all.”
After looking at the numbers, Banning decided to skip the forthcoming wholesale season and instead concentrate on higher-margin, direct-to-consumer sales, while also focusing only on bestselling styles. “It’s that principle that 80 per cent of your business comes from 20 per cent of your products or clients,” she continues, explaining that focusing on bestsellers meant reducing wastage, and cutting costs.
“It’s that principle that 80 per cent of your business comes from 20 per cent of your products or clients”
The result? The brand’s net profit margin increased by 100 per cent. “My business is making more money – more profit – with half the revenue,” says Banning, who adds that it’s easy for business owners to get caught up in the wrong metrics – like revenue or sales, rather than profit. “[At Ephemera] we believe in sustainable growth and the mantra of 'Revenue is vanity, profit is sanity, and cash flow is king'.”
Every business is different
When trying to boost profits, it’s important that business owners consider their own unique business model. Just ask Irene Falcone, the founder of natural wellness e-tailer Nourished Life.
Falcone sold Nourished Life for $20m in 2017, but when it came time to launch her next business, non-alcoholic drinks e-tailer Sans Drinks, she soon realised that she couldn’t simply repeat the strategies she’d used at Nourished Life. “In terms of replicating my blueprint for how to be profitable, I had a lot of things against me in a new industry.”
In the drinks industry, Falcone quickly realised that margins were much lower than in beauty – partly because the products are heavier and cost more to ship. Drinks are also sold at restaurants and bars, as well as online, which changes the business model – and profit margins.
Nevertheless, there are certain tactics that Falcone and other experts agree can drive profitability in all businesses.
1. Cut costs
While every business wants to sell more goods or services, cutting back on certain expenses is one simple way to increase profits – even if it means focusing on small cuts at a time.
Falcone saves money by reusing the boxes that her products are shipped in for customers’ pick-up orders and storage. “It might only be [saving] $50 a week – but that’s $50, times 52 weeks a year.”
Falcone adds that cutting wasteful spending can also offer environmental benefits. For example, she has replaced plastic tasting cups with crystal glasses - saving money, reducing waste and providing a better customer experience.
Tip: How can you cut expenses? Can you renegotiate supplier rates or contracts? Audit your accounts to identify overspending, and possible ways to cut costs.
2. Identify top performing products or services
If you run a small business, do you know what your conversion rates are, how many leads you are getting each month and what the margin is on each sale?
Andrew Mattner, director at Altitude Advisory, says many small business owners resort to “making stuff up”.
“If you don’t know your data, then you can’t improve it.” Once you know which products and services generate the most profit, you can focus your attention on them.
“If you don’t know your data, then you can’t improve it.”
Tip: Undertake an audit of your sales data to identify top performers – as well as products or services that aren’t selling and are tying up cashflow.
3. Identify your value proposition – and set prices accordingly
Forget discounting products says Mattner, adding that it is a flawed strategy that should only be used to clear slow-moving or dead stock that’s chewing up cash flow.
Instead, he recommends small businesses focus on their value proposition, which should be well communicated via marketing. What does your business have that sets you apart – is it exceptional customer service, a fantastic product or something exclusive? “If you’re not competing just on price, then don’t fight on price.”
Tip: Ask yourself if your pricing is correct? If you’re not the cheapest in the market, are you adequately conveying your value to customers?
4. Focus on retaining customers
It’s an oft-quoted fact that it costs more to attract a new customer than to retain an existing one, with experts estimating that recruiting new customers is five to 10 times more expensive.
Falcone agrees. “I believe that the best way to make a profit is to retain a customer and not have to start again.” That’s why she invests in retaining customers and driving repeat business by offering the smoothest, fastest experience. She dispatches deliveries multiple times every day, gives every customer her mobile number in case something goes wrong. “I will be able to fix that problem in 30 seconds.”
Tip: Understand why customers leave, and focus on ways to keep them coming back, whether through a loyalty scheme or excellent customer service
For more ways to boost small business profitability read:
3 money mistakes that small businesses make
How to calculate your profit margin – and why it’s important
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