213 | 4 Ways To Increase Your Product Profit Margins With Katie Hunt
How can I increase product profit margins?
Let’s talk profit margins.
Your profit margin is the amount of money left over once your production costs and expenses are deducted from your revenue.
If you’re selling an item for $10 and your expenses to produce that item are $4, your profit is $6 and your profit margin 60%.
Hard numbers calculate profit but, to determine profit margin we use percentages.
When I’m reviewing my own financials, I look at profit margins from both a macro level — how is the business as a whole doing, as well as a micro level — how are different products or programs doing.
These data points help me make decisions in the business about what to continue doing, what to discontinue and generally fuel strategic decisions. You should be doing the same for your product-based business.
In this blog post, I want to look at profit margin from a micro-level — and share with you 4 ways that you can increase your profit margins for specific products you sell.
4 Ways To Increase Your Product Profit Margins
REDUCE YOUR PRODUCTION COSTS BY ALTERING YOUR MATERIALS OR YOUR PRODUCTION METHOD. Can you use less expensive materials without negatively impacting the end product? Can you try new production methods that don’t take away from the customer experience but reduce your manufacturing expenses?
Just because you’ve always used certain materials or manufacturing methods doesn’t mean you need to continue that way. Look at your product line to see if you can reduce expenses surrounding the materials or production methods you’re using.
Lowering expenses for each product category will increase your profit margin.
Increase your manufacturing quantities.
When you start with a new product, you want to curb your risk by doing smaller manufacturing runs to test the product and see how it sells. Smaller production runs, however, means that you’re paying a higher price per piece (and that your profit margin will be smaller).
I suggest doing two things:.
1.) Talk to your manufacturing partners about volume discounts and see if they can gang up pricing for products categories that have multiple SKUs.
2.) Do an audit of your product line & inventory to see where you’d feel comfortable bumping up your production quantities.
I don’t want you manufacturing thousands of units of a SKU if it doesn’t have a track record for selling well — but thoughtfully increasing your manufacturing quantities will lower your price per piece and increase your profit margins.
Simplify your packaging.
Packaging is fun to design — it's how we connect with our customers and create a strong customer experience when they buy. However, packaging is an area where most product based businesses overspend.
For example, are you using extra embellishments like twine, belly bands, stickers that could be removed from your packaging? If these items aren’t serving a purpose (educating or informing the buyer’s decision or serving as marketing for your brand), consider removing them. Added steps in your packaging not only add to your production costs but they also add to the time you’ll spend packaging your goods.
To maximize your profit margins, I’d encourage you to review your packaging choices and see if there are other options that you can utilize to reduce your costs without negatively impacting the customer experience.
“Increasing your profit margins for your individual product categories will make your business as a whole stronger, and it will enable you to pay yourself more money or reinvest it back into the business.”
The fourth way you can increase your profit margin is to raise your prices.
Now, I’m not one of those business coaches who casually tells people to “just raise your prices 10% across the board!” Raising your prices is a strategic move that requires research and planning. I want you to do market research to see if you’re in alignment with industry pricing. If you’re below the average price for similar products, you’re leaving money on the table.
If you’re priced higher than market rates, you could be missing out on sales. But, most clients I work with are charging too little for their products, which hurts their profitability.
It's important to keep in mind that the longer you’re running your business, the more important these audits are.
For example, if you’ve been selling your products at the same price for 5 years — it's likely that during that time your production costs have increased AND the market rate has increased. By not increasing your pricing or looking at your production methods you’re losing out on additional profit for the business.
Ok, so to recap, 4 ways that you can increase your profit margins for your products are to:
Reduce your production costs by altering your materials or your production methods.
Thoughtfully increase your production quantities so that you’re getting a better price per piece
Simplify your packaging to reduce those expenses.
Raise your prices to ensure that you’re in alignment with market rates.
Increasing your profit margins for your individual product categories will make your business stronger and enable you to pay yourself more money or reinvest it back into the business in different ways.
Alright friends, I hope this was helpful for you. If you’re interested in diving deeper into the numbers or are looking to scale the wholesale side of your business, be sure to check out our Paper Camp program. I only run Paper Camp twice a year and we sell out every time. Paper Camp is our signature program where we teach you how to get your products on the shelves of your favorite stores. You can find our Paper Camp alumni’s products at Starbucks, Barnes & Noble, Target and independent boutiques around the world. Learn more at www.prooftoproduct.com/papercamp
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Connect with Katie Hunt
Katie Hunt is a business strategist, podcaster, mentor and mama to four. She helps product based businesses build profitable, sustainable companies through her conferences, courses and coaching programs.
Website: prooftoproduct.com | Instagram: @prooftoproduct
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