How to Increase Profit Eliminating 8 Reasons of Low Profitability
Probably you already know that the survival of your small business will be highly related to the profitability rates. When profitability decrease, many problems come for each company. One crucial question that many entrepreneurs ask is why their businesses are not as profitable as they want to be.
When it comes to startups and new businesses, many of them have problems in achieving positive profitability. This is normal for startups. In many cases, some examples show that some companies start to be profitable with high profitability growth. Then suddenly, something starts eating their money without realizing that it is happening. The fact is that many small companies fail in their first year, and the most significant reason is that they don’t succeed in generating a sufficient profit.
The losses are the worst thing that can happen. More worrying is that losing money can start slowly, even without noticing that you begin to lose money. But, this can be fatal for your business.
So, it would be best if you found out why your small business is not profitable quickly. When you find the answer to this question, you can act faster to stop your company’s failure.
So, what prevents you from being profitable? Here I would like to discuss eight critical reasons why your business is not profitable and how you can fix them to succeed.
1. You Charge Too Low Prices for Your Products and Services
Your pricing strategy is an essential part of defining your company’s profitability. If you keep your costs low and use higher premium pricing, you will have higher profitability. It is the simplest logic in doing business. You will always need to keep your costs low and sell your products and services at higher rates.
For example, if you price your products and services for $100 and your costs are $80, your profit margins will be $20. But if you succeed in pricing your products and services for $20 more, $120 total price, then your profit margin will be $40. It is 100% larger profitability for only a 20% increase in your prices.
Keep in mind that your profitability is directly related to your prices and margin. You need to pay attention to one crucial thing is not your gross revenue but what will stay after paying your costs. If you have a higher margin when you price your products and services, you will automatically have more money to spend on new product development and new value you can add to your total offer.
What Will You Need to Do to Charge Higher Prices for Your Products and Services Higher?
- Look at your pricing strategies and check what type of strategy you are using. Is the strategy something that dictate lower profitability?
- Increase the value that you ship with your products and services to your customers.
- Be sure that your customers recognize the added value you bring to them for a higher price you get from them.
- Start increasing your margin and invest part of this profit in the new product development and add value to your customers.
- Build a strong relationship with your customers to bring additional value for them because o working with you.
2. You Have Setup Very High Profitability Goals.
I know that you want to have strong profitability rates. But, are they something achievable for you? What is the industry and market average?
I know that I talk about the additional value that will help you make prices higher at the first point. But everything has some limits. For some products and services, you can not go too much higher than the industry average. Yes, you can have higher prices from the industry average with additional value, but the difference can not be very high.
What Will You Need to Do to Setup Achievable Profitability Rate?
- Analyze your industry and market about the current prices.
- Analyze how much your competitors price their products and services and what they offer for these prices.
- Make a benchmarking to compare your company, your prices, and your own and your competitor’s value offered to customers.
3. You Spend Too Much on Things You Don’t Need
Many entrepreneurs start to spend too much money after their initial startup success. But, the question is, do they really need to spend on things that they don’t need?
Sometimes you want the best possible technology to have, yet your company can ship the same value to customers with existing ones. Some entrepreneurs I have seen buy new technology even if they have the possibility of improving the existing one and bringing the same results as the new one.
So, you really need to think about your spending. The money and your small business’ cash flow are essential for your company.
What You Will Need to Do to Stop Spending Money on Things You Don’t Need?
- Determine what you really need for your small business and what is really important to you.
- Try implementing a minimalist approach inside your business. This approach can save you a lot of money.
- Track your spending and make the right decision about future spending.
- Integrate control mechanism related to your business spending.
4. Your Costs are Higher Than You Can Cover With Your Prices to Reach Desired Profitability
As I mentioned earlier, it is crucial to have a higher margin to ship additional value to customers and have higher prices for your products and services. The one side of the margin is your profitability, but the other side your small business costs. Your expenses can start increasing at the highest rate and become out of your control if you don’t do something to prevent this.
Think about how much you pay to your suppliers, how many employees you have, how much costs you have to produce a single unit of your products and services, how much are your utility costs, etc.
If you succeed in decreasing your costs, you will automatically increase your profitability without increasing your prices.
What Will You Need to Do to Decrease Your Costs and Increase Your Profitability?
- Analyze your current costs and try to find cheaper options for the same value.
- Are there some cheaper options? Can you use them instead of the expensive one that you currently use?
- Start controlling your costs and improve your business processes to decrease them.
5. Your Small Business is Competing on Highly Competitive Market and Because of That You Are Not Profitable
Do you know how many competitors your small business has on a target market? This is an important question when you want to set up profitability objectives. In highly competitive markets, many times, the main competition relies on pricing strategies. This means that your competitors, to have a more significant portion of the market, will start decreasing prices, and in such a way, profitability. They try to succeed in the economy of scale.
When they come in such a position on the market, most of the entrepreneurs follow their competitors. They decrease their prices and profitability. There is a small portion of smart entrepreneurs who know that this is a bad strategy. So, they increase the value for their customers instead of lowering prices. Also, they create a small but wealthy niche to differentiate from their competitors.
What Will You Need to Do When You Compete in a Highly Competitive Market to Ensure a High Level of Profitability?
- Define your main competitors and analyze what they are doing to succeed in the market.
- Determine your current market share and estimate your profitability as a function of your market share.
- Implement benchmarking analysis to compare your company with your competitors in terms of value for customers and market share.
- Define what you need to do to keep your profitability at a high level and increase your market share.
6. You Don’t Market Your Small Business in the Right Way and Because of that You Are Not Profitable
Do you market your small business, your products, and services most effectively? Do you know the ROI for each dollar you spend on marketing? I have seen many small business owners spending a lot of money on their marketing efforts without measuring the results they achieve. In such a way, they don’t know if they succeed or not with their marketing efforts.
Marketing is an essential function of your small business. The first contact that your company makes with the customers is with your marketing. If you market your small business in the right way, you will have many customers that will not ask for the price of your products and services. In such a way, your profitability will not be questionable.
What Will You Need to Do to Market Your Small Business in the Right Way?
- Create your marketing processes to follow them easily and improve them regularly.
- Check the messages that you send to your customers through marketing activities. You need to ensure that the messages clearly show the value that you offer to your customers.
- Focus on your target market and build a strong relationship with your customers.
- Regularly analyze your marketing efforts regarding ROI and improve daily what you are doing when it comes to marketing.
7. You Are Facing too Much Unpredictability and Because of That You Are Not Profitable
Some months you have very high costs, and some months your sales team doesn’t achieve the results they need to make. Sometimes there are too many complaints from customers. All of these unpredictable results come because of inconsistency in your small business.
For example, your small business sales team doesn’t use the unified process to build a strong customer relationship. Or your marketing team doesn’t have unique marketing processes that will need to be executed consistently to bring results to your business. These aren’t external factors that bring inconsistency, unpredictability, and low profitability. These ate things that you will need to solve in your small business.
What Will You Need to Do to Make Unpredictability and Inconsistency in Predictive and Consistent Business?
- Create strong business processes that will support consistency in the daily operations of your small business.
- Use standard operating procedures for each process in your small business.
- Base your forecasting on predictive analytics and don’t overestimate the role of external data.
8. You Don’t Innovate and Because of that You Are Not Profitable
I put this reason why your business is not profitable at the end of the list, but maybe it will need to be in the first place. If you don’t innovate, you can not be at the top of your market.
You need to innovate new products and services to bring new customers to your company. Also, you need to innovate new products and services to satisfy your current customers.
What about your business processes? Are they designed to operate most optimally? What about the cost that they are making? Are they satisfy your customers?
Additionally, your business model is essential for the profitability of your company. Can you improve something to cut costs and bring in more customers? Can you do something to increase the profitability of your small business?
What Will You Need to Do to Make Your Company Innovative Company?
- Make creativity to be in place for all team members in your small business.
- Use a systems approach in bringing and executing innovative ideas in your company.
- Use crowdsourcing as a part of your innovation process.
- Innovate new products and services, new processes, and new business models.
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