Improving gross margins

Your gross margin is the price of the item you are selling minus the cost of producing that item. This doesn’t include the cost of indirect expenses such as office expenses etc, only the cost of producing that item. So if you were an electrician and were fixing a broken socket, the cost of that job would be any materials such as wires and the cost of your time.

Many business owners overlook the importance of gross margin but it is an extremely important number for every business to manage. It impacts the likelihood of reaching breakeven and the amount of profit that is earnt beyond the breakeven point.

Having little or no understanding of gross margin can be fatal for any business. Lack of understanding can often lead to the wrong decisions being made which worsen the company’s position, such as attempting to increase sales via price reductions leading to even smaller margins.

Once you know what your gross margin is, you may want to consider ways of making improvements.

Increase prices

Price increases are often forgotten about and certainly come as an afterthought behind cutting costs. Now this might seem like a scary thing to do, especially now when costs are rising in your business and your personal life! Consider the value you provide to your customers and think about how you can improve their experience to justify any price increases.

Stop offering discounts

If you have a gross margin of 30% and you give a discount of 10%, you would need to increase your sales volume by 50%! If by offering discounts, you are increasing your sales volume by more than 50% then it’s probably worth carrying on, but if it’s not, stop offering discounts now.

Up selling

Let’s take McDonalds as an example. When you order a burger the server will always ask you if you want fries with that. Do you want a drink with that? Do you want to upgrade to a large meal?

Think of your product or service and identify any items that you could offer as an upgrade. Perhaps a company offering boiler repairs could ask customers if they’d like to sign up for a maintenance package so that they get emergency callouts free of charge.

Product mix

Do you know the gross margin of each of your products or services? It’s not always true that your most expensive item has the best margin. It may be that your middle range product or service has a much higher margin than your top range product or service. This means you should put more effort into selling the middle option as this will have a greater impact on improving your margins.

Negotiate better terms with your suppliers

The things you buy to produce your product or service are known as your cost of sales. The lower your cost of sales, the higher your gross margin. Therefore you should always ensure that you are getting the best possible terms from your suppliers. Make sure you have a date booked in the diary to re-discuss prices with suppliers and look to benchmark. A small improvement in purchase prices can have a huge impact on your profit and cash.

If you need help with your margins, we’d love to hear from you: hello@opticsaccounting.co.uk