How B2B Businesses can Maximize Their Profit Margins
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When a B2B business looks at its profit as a dollar amount it may look okay. But, what is the profit margin? It is a percentage or ratio of profit versus total revenue. Profitability calculated this way margin shows the ability of your company to maximize revenue while minimizing cost. When you know this you can compare the efficiency of your B2B business with comparable businesses. By knowing the profit margin of your B2B business you can work to improve it. Here we discuss how B2B companies can maximize their profit margin.
How to Increase Your Margin of Profit
Different parts of your business will commonly have different margins of profit. Calculating margins for each business segment, product, or service are important metrics.
The calculation uses total revenue and subtracts costs to give net revenue. Net revenue is divided by total revenue to give the answer. This number multiplied by 100 gives the profit margin as a percent.
100 x (Total Revenue – Costs) / Total Revenue = Profit Margin as a Percent
And, you can subtract your net income as a percent of total revenue to show the margin of profit with your income as a “cost” of the business.
Profit Margin as % – Owner’s Net Income as % = Adjusted Profit Margin as %
Optimization of the margin of profit for the business is done by calculating margins of product by products, services, and business segments. This provides a useful picture of not only how your business is doing as a whole but also where the problems are when long and short-term profits are lagging.
The easy answer for maximizing your margin of profit is to bring in more money and spend less on things like raw materials, retention of sales reps, automation, distributors, sales team, and attention to your supply chain. The real answer is more complicated.
What Is a Good Margin of Profit?
Depending on the industry or business sector, fifteen to twenty-five percent is an attainable percentage. The average net margin of profit for businesses in the USA across all sectors is 7.71%. A bad margin is 5%. A 10% margin can be acceptable in some sectors and 20% or better is what businesses should aim for. If you are in a competitive business environment like New York City or fighting Amazon to sell online, these numbers may change.
What Is a Good Return on Your Business Investment?
While investors in stocks can expect a 7% return on average, investors in a small business should aim for 15% to 30%. This figure is commonly used when buying a business. However, a poorly run business with a low operating profit can be improved. With a higher margin of profit, a new business that you purchase with the expectation of a 10% margin could be three times more valuable if you can get profitability up to 30%!
Keys to How B2B Businesses Can Maximize Their Profit Margins
Maximizing your profit margin means establishing benchmarks and tracking KPIs, finding cogs and expenses that you can reduce, and finding new products or other ways to bring in more revenue for your products and services.
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Review and Reduce Operating Costs
The first practical step to maximizing profit margins is to examine each of the costs of operating your business. Go through your operating expenses one at a time. Look at what you have been paying for each item over time. Are those costs going up? If so, why is that? When you are able, compare what you are paying to industry norms for the same costs.
Besides looking at the procurement costs consider whether or not that item adds value to your company. The world of business is always advancing. Make sure the things you are paying for are making a positive difference in today’s fast-paced world.
Look at who on your payroll is doing what jobs and how many people it takes to get things done. Again, industry norms are useful when determining how many employees you should have to accomplish the work at hand. As you are doing this, remember Parkinson’s Law, the observation that work expands to occupy the time allotted for its completion and one of its many corollaries that projects always expand to use up all budgeted funds (and more). Many business owners are pleasantly surprised when they reshuffle their staff and find that fewer people can get more done when properly managed. And, of course, this can lead to more work getting done, more revenue, or lower payroll for the company.
Maximize Profit Margin by Increasing Revenue
Managing your gross profit margin will increase your profitability. Selling more and having an effective pricing strategy that allows more for what you sell without greatly increasing your cost of goods sold, you will be on your way to maximizing a pricing strategy and profits in your B2B business.
Depending on what your company does in the business-to-business world, competition may make it difficult to routinely increase your pricing unless you provide value to your current customers that offset your higher prices.
Offering a product line and services tailored to your best existing customers may be a way to reduce their operating costs or increase their profits. You can increase customer lifetime value to your business by working closely with them to optimize your value to them while optimizing their value over a lifetime to you.
And, the time-honored tactics of cross-selling, up-selling, and reselling can be a great way to increase profit and improve your customer relationships.
One of the benefits of working closely with your current customers to help them help you is that they get to know you. This is a great way to encourage referrals and increase your revenue stream.
Get Rid of Products and Services That Don’t Improve Your Profit Margin
As we mentioned at the beginning, calculate profit margins for your total business and for individual products and services. If a given service or product is not returning a good profit margin and has no other value to your business, cut it out. But, before doing this make sure who it is that is buying that product or service. If it is your best customer, consider keeping the product or service as a loss leader or simply implement price increases bit by bit.
Cutting Out Customers Who Don’t Help Your Profit Margin
If you have customers who use up a lot of your time and resources, you need to do a bit of cost accounting and pricing decisions to increase what you are charging them. You really should never “fire” a customer but many of your poor-paying customers will fade away when they have to pay what your products and services are worth.
Manage Cash by Tracking and Budgeting Expenses
In the end, how B2B companies can maximize their bottom line is by knowing where every dollar they spend is going. Set up a system for paying bills and a tracking system to match. And, set up a budget using separate accounts and one that leverages natural behavior such as allocating owner’s pay into its own bank account.