6 ways to increase profitability to drive growth.

Melissa Butler

I'm the Founder and CEO of The Lip Bar, a beauty brand started in my kitchen while working on Wall Street. Since my early days juggling a nine-to-five and small business ownership, The Lip Bar has become a pioneer in beauty and inclusion, and the brand is now sold in Target and Walmart stores across the country.

In the last year, I increased my company’s profitability by 400 percent. Yep! It’s true. Unheard of, I know! So how did I go from no profits, to 18 percent profitability in 12 months? By understanding the cash inflows and outflows of my business, I was able to retain earnings and reinvest in my company.

And I’m excited to be able to share six of the tactics I found to be most helpful in building a profitable business.

1) Waste not want not – eliminating waste

There’s a popular phrase, “waste not want not,” that adults tell children in regard to eating their food and finishing meals—and as most things our parents tell us, it’s true!

You must eliminate the waste in your business, if you want to make room for better habits. Here’s where I'd recommend you start. Take a fine-tooth comb through all your expenditures and determine the value each line item brings.

If you can point to a return on the investment for each dollar spent, then that's a dollar well spent. If you can’t quantify the benefit of the spend, re-evaluate and consider eliminating the waste.

Expense reduction can come in many forms including but not limited to shipping, personnel, marketing materials, etc. And as a business owner, it’s necessary for you to test and learn new tactics to increase sales and profitability. But remember, it’s a test!

One of my favorite expenses to cut is slow moving products. If I launch a product and it doesn’t sell, I cut any budget that was allocated to said product and re-invest the money into other products that are fast movers. With every dollar I spend, the goal is to acquire new customers, more cash or both!

2) Reduce bill of materials

In most organizations, particularly product-based businesses, people and inventory are the priciest expenses. Great people are necessary in any growing organization. So there’s not much you can do in the name of elimination there. But there's a huge opportunity within your supply chain.

Managing your inventory for efficiency and economies of scale is essential. Evaluate your bill of materials (BOM) that it takes to get a finished good, and look for ways to minimize your footprint to increase profits. Your BOM could include but is not limited to:

  • Stickers
  • Labels
  • Containers
  • Paper
  • Boxes

Make sure everything is useful and multi-purpose on your BOM. Can you order more of the same to streamline production costs—e.g., can you have just one style of packaging and change the label for different products? Wherever you can drive multi-use is where the cost savings will be.

3) Make your suppliers your partners and renegotiate often

As a small, scaling business, you are subject to the mercy and risks of your suppliers. As a leader, your job is to make certain your suppliers value your business. After all, mutually beneficial relationships are the only relationships to have. Consider the following when it comes to ensuring a productive relationship with your partners.

  • Think of your suppliers as essential business partners, and let them in on your goals, challenges, and expectations, while understanding what their goals and processes are.
  • Be clear about the milestones you plan to achieve, and understand in advance the price breaks that come along with your growth.
  • At every new level of your business, renegotiate. By keeping your partners in the loop on your growth and your vision, you give them an opportunity to believe in and value your business.

Supplier pricing tip:
Cost of goods sold should never exceed 30 percent of retail price. Think about it this way: The product is just one of the many things you have to pay for to build and scale a business.  At minimum, you will have personnel, marketing and technology costs. So be sure to create room for those expenses.

If you find that your supplier isn’t in alignment with your need to stay in budget, consider finding new suppliers who are happy and hungry for your business. As a small business, be careful working with big suppliers—they have high financial thresholds and they may prioritize their large clients.

No matter the type or size of the partner, it’s imperative to use open communication in order to establish the value of your business. This level of communication encourages key stakeholders within your partnership(s) to remain aware of maintaining an efficient process to meet your needs. 

4) Think twice about discounting

Customers will believe whatever you want them to believe, and many small businesses train customers to shop their products only in times of deep discounts.

I learned this lesson the hard way. I did promotion after promotion to drive sales, and then I just stopped and decided we would incentivize and desensitize our customers from shopping sales.

The reality is discounting is a cheap and easy way to boost your revenue, but it kills profitability. Every dollar discounted is a dollar that you could’ve had if sold at full price. So how do you drive sales in lieu of discounting?

  • First, make sure people are buying your products because they are solving a problem or fulfilling a need.
  • Second, it's time to get creative! Think of ways to incentivize the customer.
    • What’s important to them?
    • Can you do a gift with purchase?
    • Can you incentivize them to build their loyalty, to cash in on a larger reward later?
    • Free shipping?

By not discounting the actual product, you remind the customer of the value of your product. Think of all the companies that never have sales. And think about the public perception of those companies. Now think of all the companies you only shop with on sale. Doesn’t the latter feel more replaceable than the former? Keep your brand perception and your prices intact.

5) Price increases

This one is simple and straightforward: INCREASE YOUR PRICES! I know, it sounds scary. People are used to paying a certain price, but increasing your prices does a few key things for your business:

  • It allows you to take away more profit for each sale of your product or service.
  • Customers often assume that higher priced items are of higher quality, so you have the benefit of increasing brand perception.
  • Increased cost takes a bit of the pressure off the need to attract new customers.

Things to consider when increasing prices:

  • The perfect opportunity to increase prices is when you’re launching something new or refreshing a current product/service.
  • Increase the price on a product that customers love! If they love it, they will continue to buy even at a 10-15 percent increase.
  • Any increase above 15 percent, you may run the risk of losing customers.

6) Increase customer retention

Keep your current customers coming back with engaging content via email and on your company’s social media channels. It's 30 percent cheaper to keep a new customer than to get a new one. Increasing customer retention rates by five percent can increase profits by 25 to 95 percent, according to Bain & Co.1

So not only is it cheaper to keep your current customers, if you nurture the relationship with them, you can increase sales and profits by up to 95 percent—and you can also use current customers to attract new customers via referral programs. People are four times more likely to buy a product if a friend recommended it.

Keeping your current customers happy is the easiest and fastest way to drive growth and increase profitability.

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