When running a small business, profitability is of utmost importance. Businesses that aren’t profitable can’t stay up and running without a constant influx of cash from a steady source.
Continually Burning cash is no way to do business. It might seem to work for some companies, but in the long run, cash burn will eventually catch up, one way or another.
It just doesn’t make sense for business owners to keep doing what they’re doing if they’re not making a profit. And yet, some owners do keep plugging along, sometimes throwing good money after bad. It’s fairly common for small businesses to operate at a loss.
Small business profitability by the numbers
Believe it or not, a meaningful percentage of small businesses fail in a short amount of time, and profitability is a major issue. According to the Small Business Administration, approximately two-thirds of businesses with employees survive two years, while only half will last five years.
A U.S. Bank study found that 82% of businesses that failed did so because of problems with cash flow, and it’s easy to see why. Only 40% of small businesses are profitable, and 30% lose money on a continual basis. The remaining 30% are break even, so they’re not turning a profit either.
Business owners who aren’t turning a profit can find ways to turn things around. At first thought, it may seem like the only way to increases profits is to raise prices, but that’s not the only way to boost profits.
In fact, there will likely be a limit as to where prices can be raised. If prices are moved too high, customers won’t buy, which will send the business into a downward spiral.
In addition to raising prices, other ways to boost small business profitability include cutting expenses, increasing return on investment, finding more customers, and increasing the order size or revenue per customer. Those aren’t the only ways to boost small business profitability.
Lessons on profitability from Apple
Before discussing practical strategies to increase small business profitability, it’s a good idea to look at other profitable businesses to see how they increase their profit margins.
Perhaps the epitome of profitable businesses is Apple. For many years, the iPhone maker was the most profitable public company, although it has since been unseated by the soon-to-be-public Saudi Aramco.
The iPhone has been Apple’s main profit center for years, although this is changing. The company recorded significant profit growth as it sold more and more units, but as the smartphone market became saturated, it wasn’t possible to boost profits by selling more iPhones.
The next step was to increase the average revenue per user, which Apple did by selling more expensive models. The iPhone X was the company’s first $1,000 model, and after it was released, the company saw its profits rise 40% year over year, thanks to the increased average selling price of $724.
The more expensive price tag enabled Apple to keep growing its profits even as competitor Samsung struggled due to the saturated smartphone market. The company also looked to other businesses with higher margins to increase its profitability.
In 2018, even though iPhone unit numbers were flat year over year, the company’s profits jumped 32%. The higher-priced iPhone wasn’t the only thing Apple was doing to boost profits.
Revenues in the higher-margin services business grew more than 30% year over year in the June quarter of 2018. The services business includes the App Store, iCloud, Apple Music subscriptions, and AppleCare.
The gross margin on Apple’s services business was about 63% as of earlier this year. That’s close to double the gross margin on the iPhone business, which indicates just how much of a difference adding high-margin businesses can make for a company’s bottom line.
10 strategies for boosting small business profitability
In the case of newer businesses, raising prices may not be the correct first step to raise profitability because they haven’t built a reputation yet. However, if prices are much lower than the competition’s prices, an increase may be necessary.
1. Find more customers.
Aside from raising prices, the other obvious option to increase small business profitability is to find more customers. Business owners can do this through a variety of marketing channels.
Advertising is the most obvious marketing channel, and it can take the form of digital, TV and radio, and other print ads. Information marketing is another option. It includes publishing articles online, often targeting keywords that relate to the business.
Information marketing can also include publishing whitepapers on topics related to the industry in which the business operates. Offering free whitepapers can be an excellent way to get prospective customers’ contact information.
2. Gather more leads and market to them.
Marketing and advertising are just one step in the process of getting new customers. The other part of the process is collecting contact information and reaching out to prospective customers.
The average salesperson only follows up with prospects two times, but half of all sales happen after the fifth contact.
Getting leads often costs money, so marketing dollars are wasted by not following up on the leads that were gathered. The easiest way to ensure that leads are followed up on is to have a formal process for doing it.
Business owners should have a step-by-step plan for what to do when they get leads. If the first or second call or email doesn’t garner a response, there should be a plan to stay in touch, especially if it seems like they could buy at some point but simply aren’t ready to buy yet.
Automating the process also makes the business operate more efficiently. Emailing newsletters is an excellent way to stay in touch and keep the business’ name in front of prospective customers while providing them with enough value that they remember it when they are ready to buy.
3. Increase the average size of orders.
Customers who already spend money at the business could be convinced to spend even more money there. Thus, current customers are one of the best sources of additional business.
Business owners should cross-promote other products or services they sell to increase their average ticket size. Upselling clients to more expensive products or services is another way to increase ticket size.
The key is to explain why the customer might want to buy the more expensive product and how it will make things better or easier for them than the less expensive model.
For example, if a customer is buying a tablet with 16 gigabytes of memory, the salesperson could say something like, “The 32-gigabyte model is only $50 more, and it will last much longer than the 16-gigabyte model because you won’t run out of space so easily.”
Doing this in person may require some extra training for employees, although it is possible to do it online by adding suggestions on the shopping cart page of an online store.
4. Add new products or services.
Offering products or services that are adjacent to what the business already sells is an easy way to increase the size of orders and attract more customers. Business owners can ask current customers what types of products or services they would like to see to learn where they can get the most value for their investment.
It’s also important to research the market before diving into any new product or service. Just because customers are asking for it doesn’t mean the demand for it is very widespread. It’s possible that only two or three customers want to buy it.
One important question to ask when adding new products or services is what kind of margins they will offer. Higher-margin businesses like services offer significant profits with less overhead.
For example, offering maintenance to go with the products the business sells not only adds a new higher-margin revenue stream. It also provides great customer service, which will only serve to improve the business’ reputation in the industry.
5. Cut expenses.
Profitability is measured by gross and net margins, especially net margins. Reducing expenses will increase the net margin as the business owner spends less on operations, increasing profits in the process.
Cutting expenses may include switching to a less expensive supplier, spending less on supplies, or reducing staff or staff hours. Laying off staff members is one of the most difficult aspects of business, but it can be necessary.
Business owners should calculate their productivity ratio by adding their total payroll and payroll-related expenses, then divide the result by the number of sales they bring in. If the productivity ratio is greater than 100%, it may be time to start looking at staff cutbacks.
6. Look at line items for more clues.
It may not be obvious where expenses can be reduced, so it becomes necessary to break down the budget by line item, looking at each product or service and the expenses involved in selling them. Not every product or service might be profitable, so examining each one individually can enable business owners to root out the ones that are running at a loss.
Analyzing each line item in the budget enables business owners to see exactly where their money is going and how much it costs to do business for every section of the business. Some segments may simply be more trouble than they are worth.
One other area to look at when it comes to cutting expenses is the miscellaneous section. If the expense isn’t important enough to be categorized under a specific segment, then it may not be needed at all. The miscellaneous section could be filled with unimportant expenses that it may be easy to cut.
7. Do more with less.
Business owners should also consider how efficient their operations are running. When considering the expenses associated with each product or service, it’s also important to look at which products or services bring in the most revenue.
It makes more sense to spend more money in areas that are bringing in more revenue than others. Business owners may even want to consider cutting products or services that are expensive to maintain but don’t bring in much revenue.
Any products or services that are cut can then be replaced with ones that can capture significant amounts of revenue with fewer resources or capital being allocated to them. The focus should be on high-margin products and services whenever possible.
Time is also a valuable commodity. Some business owners hold regular staff meetings, but if nothing really gets accomplished during these meetings, it may be time to cut them or at least reduce the length of them. Doing this will free up more time for making sales or carrying out other labor that brings in revenue.
More time can also be captured by automating tasks that can be automated. For example, inventory systems and some marketing could be automated to save time and free it up for more important money-making work.
Storing things digitally instead of printing everything out can also help things run more efficiently and with lower expenses. Business owners save money on ink and storage space by utilizing the cloud.
8. Monitor inventory levels.
Storing products costs money, which means inventory storage can be a sneaky expense that takes up more money than noticed initially. Businesses shouldn’t be spending money to store items that never sell, so it’s important to monitor inventory levels continually.
Inventory management software offers an excellent way to stay on top of which items are selling and which aren’t. The software makes it easy to keep products that sell well in stock while getting rid of products that don’t sell and merely take up shelf space in the warehouse.
9. Look for ways to increase your return on investment.
How much is being spent to get sales? There are many ways to market a business, but not every marketing method works well for every type of business.
Business owners should evaluate each marketing method they are using to see which are paying off the best. It might be time to eliminate one or two marketing outlets to focus more on the top one or two that give you the greatest ROI on invested ad dollars.
It’s always important to conduct regular audits of the business even when it isn’t struggling to turn a profit. Staying on top of where the business stands will enable the owner to head off profitability issues before they become something that puts them out of business.