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If your profit margins aren't rising, chances are your company isn't thriving. Here are five solutions to the problem
Is your profit margin higher than it was five years ago?
I asked that question, along with several others, in my last column. I suggested that one way to boost your profit margin might be to get rid of some of your customers. Now let's look at some other reasons your profit margin might not be rising—and what to do about it.
I believe that your profit margin trend is the single most powerful indicator of your company's health. As margins decline, companies cut their sales and marketing efforts. Manufacturers postpone plant upgrades and delay research and development. And it becomes a lot less fun to own a business. Obviously, something needs to be done.
Here are five bold solutions to help increase your profit margin:
1. Fire Your Customers.
Getting rid of the 20% of your customers who provide the lowest profitability frees up capacity and resources to do work that is more profitable.
2. Go for Mailbox Money.
"Mailbox money" is what I call checks that show up even though you're not doing any extra work. To get mailbox money, license your intellectual property to another company. I know a small automotive parts maker in the Midwest who licensed out his unique manufacturing technology to two companies, one in Europe and one in the U.S. Royalties from those deals have kept him in business even though orders from U.S. customers have declined.
3. Set yourself apart.
Focus your energy on products that are meaningfully unique. A business owner I met in the Southwest used to manufacture more than a thousand different types of ceramic tiles and accessories. He voluntarily discontinued about 80% of his products, focusing his sales and development efforts on products that gave him a competitive edge. The result has been a rebirth of the company. He has doubled his profit margin and increased sales.
Look for opportunities beyond our borders. The decline in the value of the U.S. dollar has opened up tremendous opportunities for more profitable sales growth abroad. Take advantage of the freedom the North American Free Trade Agreement provides. Use your network of suppliers to find international opportunities. Visit industry trade shows in other countries to seek potential distribution partners.
5. Love Your Product Again.
Reinvent your products and industry. Unique products command higher prices and greater profits. This requires that the leader of the company—you—become genuinely passionate about discovering and developing new ideas, innovations, and inventions for customers.
I'm continually amazed at the passion and energy that some entrepreneurs have reinventing their businesses. In the Northeast I met Lucky Lee, co-owner of Lucky's Tomatoes, whose life mission is to grow and deliver better-tasting tomatoes to New York City restaurants. In Arkansas I met Bonnie Swayze of Alliance Rubber Co. Her family's mission—for 85 years—has been to find new uses for rubber bands. In the Northwest I met John Crow, the owner of Lloyd Industries, which makes bakeware and pizza pans. He captivated a dinner party I attended with his passionate explanation of how the pan improves pizza quality. It wasn't the business that was captivating—it was his enthusiasm. Could you do the same talking about your business?
For a collection of Hall's columns, go to businessweek.com/go/sb/doughall
Back to BWSmallBiz August/September 2008 Table of Contents