Tips to Improving Your Small Business Profits

Every business needs to earn money to keep itself going. In a standard, for-profit company, your profit margin — the difference between your sales revenue and business expenses — often dictates your ability to grow and expand. But as a small company, how can you gain the momentum you need to increase that margin?

Whether you want to get your startup on the path to profitability or simply increase your overall profit margin, here are five ways you may not have thought of.

Focus on your customer experience
The people who purchase your products or services are the reason you have profits at all. It makes sense, then, that increasing those profits begins with honing in on the customer experience, said Yossi Caspi, general manager of North America for Nanorep, a provider of customer self-service solutions.

“Customer service can have a big impact on revenue, with data showing that more than half (52 percent) of consumers have switched providers due to poor customer service,” Caspi said. “A better customer experience will lead to lower purchase abandonment and higher loyalty, ultimately resulting in increased customer retention, brand recognition and profitability.”

Kestrel Linder, CEO of GiveCampus, a crowdfunding platform for schools, agreed, adding that customer sentiment, particularly about your product, can have a greater impact on your profit margin than your business model does. [See Related Story: Want to Boost Sales? Hire a Diverse Team]

“You must prioritize your product and your user,” Linder said. “If you build a great product that people badly want, you create time and space to refine the business model to go with it. By contrast, if you don’t make something people want, no business model can save you.”

Carefully track and justify your expenses
Starting a business comes with a lot of risk and variables, but one thing that’s entirely in your control is how much you spend. Linder noted that keeping a close eye on your finances — and making tough decisions about spending when necessary — can help keep your budget in check.

“You should know where every penny goes and what you get for it,” Linder said. “At GiveCampus, we routinely review all of our expenditures and force ourselves to justify each one in terms of the value that comes from it. We discuss how the expenditure is helping us grow [and] how it is helping us build a better product. If we can’t answer these questions in specific and precise terms, we cut the expenditure.”

“Identify where you’re spending your money … and then ruthlessly strip expenses that aren’t necessary,” added Harj Taggar, CEO of Triplebyte and a former Y Combinator partner. “Start by looking at every recurring charge you have to see if you need every subscription, or if you can renegotiate rates on existing services you’re subscribed to.”

Omar Aguilar, Americas strategy and operations leader and global strategic cost transformation leader at Deloitte Consulting LLP, added that cost-efficient practices can make things easier. These can include demand-based spending on travel and energy usage, and evaluating fixed expenses like your commercial lease, he said.

“Making more costs variable, rather than fixed, will also help address these challenges,” Aguilar said.

Look for partnership opportunities
A startup’s smaller scale can often make becoming cost-efficient a challenge, said Aguilar.

“Generally, they don’t have … [the] developed practices to spur growth like larger companies, so it can be more difficult for them to be cost-efficient,” Aguilar said. “For example, when a company buys more products, it receives more savings, but small companies have [smaller-scale] buying power than larger ones.”

One solution, Aguilar said, is to reduce the complexity of your operations. You may be able to consolidate suppliers, negotiate with vendors and suppliers, or participate in a shopping co-op to pool resources with others and buy things at lower cost.

Let data drive your decisions
Businesses generate mountains of data about their customers, sales, marketing campaigns and other key operational areas, just over the course of a regular day. Guy Amisano, CEO of Salient Management Company, a provider of retail-focused analytics tools, said the answer to increasing profits can be found in all this data. The key, he said, is to use the data to effectively drive the action.

Businesses need to “get specific and timely intelligence to the hands of decision makers,” Amisano told Business News Daily. “A better understanding of the history of investment and return can drive better, more effective decisions, and thus better results, over time.”

He added that granting data access to all levels of management “dramatically shortens the time-eating circuitry of communication and consensus by instantly exposing outlier behaviors and the root causes of variation.”

Understand (and increase) your value
Last, but certainly not least, your company needs to understand what makes it unique and different from other companies, and leverage that difference to justify a higher price than some of your larger competitors.

“The healthiest way to improve profits is by charging your customers more money and not see any drop-off [in sales], because they’re getting so much value from the product,” Taggar said. “This means you can boost profits without sacrificing your growth rate at all.”

Aguilar noted that innovative business models can help smaller businesses provide more value to customers.

“Small companies can consider alternative concepts and explore digital tools to help differentiate themselves,” he said. “Given their scale, small companies can go into digital models faster and focus more on innovation, enabling them to be more disruptive. Companies that have made it, and made a big impact in the marketplace, have been successful with different models.”