Abstract / Resumen
- 1 Cost reduction to increase the profit margin on a product
- 2 How to justify raising unit prices in order to increase the profit margin
- 3 There are many ways in which we can help you!
To increase the profit margin on product sales is one of the main objectives in most companies, but how to do so is not always obvious. In fact, it depends on a variety of factors, so in this post we will try to give you a few recommendations in order to achieve this objective.
It is in the first place important to take into account that increasing the profit margin on our products is only one of the two most used strategies to increase the company’s overall profit (apart from reducing overhead expenses). The other strategy would be to try to increase the unit sales, but in most cases, it is somewhat easier to control the profit margin than the sales volume.
In order to increase the profit margin on sales, companies may implement many initiatives, but they can all basically be divided in two types: cost reduction or price increase.
Cost reduction to increase the profit margin on a product
Many different ways can be used to allow us to reduce the cost of the products we import and, therefore, achieve a higher profit margin, without having to increase the sales price.
Regardless of the fact that every business is different from the next one and, most likely, the fact that cost reductions can be managed in many ways, we will focus here on three initiatives that will guarantee success and therefore will increase the profit margin.
To import larger volumes
We start off with a classic recommendation that actually goes way beyond the cliché with regard to imports: the more we buy, the lower the price will be. The larger the purchasing volume we are willing to commit to, the easier it will be to negotiate more efficiently with our supplier in order to obtain better prices and better overall buying conditions.
As experts in industrial imports from Asia, we can surely state that knowing how to negotiate with suppliers in countries like China is a capability one only achieves over time, accumulating experience, going much beyond merely communicating better and with less difficulties. Knowing the Asian culture, its habits and the limits of what can be done in a negotiation are key factors for success.
To reduce the number of defective products
This may sound like a very basic kind of recommendation, but it is crucial. It should be noted that defective products (whether identified upon their arrival or as the result of a customer complaint) will almost always imply a cost for the company, meaning that, inevitably, the unit cost of the remaining products will increase.
In this sense, performing strict quality control inspections during and after the production of our goods is an excellent way to save on future problems and expenses.
To reduce the commissions of third parties implied in the sales process
Quite often, companies tend to focus their sales strategy on a wrong sales channel or, at least, on a less-than-optimal sales channel.
A clear example are those companies who focus most of their sales activities on marketplaces, i.e., those platforms that will indeed contribute a sizeable part of their sales, but, at the same time, will charge high commissions, allowing the companies to make only a limited profit margin on the sold goods.
Therefore, having company-owned sales channels (specifically e.g., an online shop) will allow businesses to significantly reduce third-party commissions, but to also increase the loyalty of their customers and to exert an absolute control over their sales process.
How to justify raising unit prices in order to increase the profit margin
In some cases, the strategies focused on reducing costs may not fit in the overall business model of certain companies (or may not be sufficient). In this context, it will be necessary to go one step further and consider raising the prices of the products we sell.
In any case, it is worthwhile remembering that it makes no sense to simply increase the unit price if we do not offer anything in exchange, because in such a scenario we would end up with a strong disadvantage against our competition and our overall sales could in fact drop.
To increase the value of our product by means of branding initiatives
Or, which is the same thing, to sell simultaneously our brand together with our product.
When we buy an iPhone and we pay approximately 1.000€ for a mobile phone, the cost is not necessarily perceived as high, because it is a smartphone of the Apple brand… and that has a price. The same happens with products in a variety of industries.
To create a brand (which is an intense task, focusing on the longer term) allows us to sell an added value that overall contains the concepts of quality, security and, in many cases, value.
To commit to branding is a major initiative, because it is, so to say, a cumulative challenge (assuming our brand does not suffer a reputation crisis). Once our brand has achieved a certain positive notoriety, price increases become almost automatically accepted.
Although in order to develop in depth this topic we would need to dedicate an entire post to it, it is in any case worthwhile to remember that creating a brand is not simply spending a lot of money on advertising in certain media (whether they are offline or online). It will also imply offering, among others, a top-level customer service, technical assistance and a clear and flexible policy concerning product returns, to name just a few of the actions required.
To create a better (and more expensive) version of our products
This is a very common thing to do in relation to our product range: basically, the strategy consists in offering a minimum of two versions of the same product: a basic one and an improved one.
In order to launch in the market two similar products, but with a different performance level, the first step we need to take into consideration is to understand all the specifications of the product we wish to manufacture.
A good example would be a fitness watch: let’s design an accessory with interchangeable straps, that will show us the time and that measures our pulse, our activity and the most common exercises that a person would do with a fairly standard active life. But… we know that some customers are more demanding and they would expect the product to have a battery life of, say, 7 days and that, additionally, it would have to be resistant to water.
Great, done! We launch a basic version with the originally established specifications and another version, that may cost up to 15% more, that will include a better battery and that may be submerged in water without any problems.
When selling the entire range, for the superior product we could fix a sales price that is up to 30% higher than for the basic version, generating an additional 15% of extra profit.
There are many ways in which we can help you!
As seen all along this post, there are many different options that companies can use in order to increase the profit margin on their product sales and, hence, increase the overall profit of the business.
As experts in sourcing, we are in touch with a variety of business activities, all of which we not only help with their import activities, but we also help them with consulting and guidance on how to optimize their economic processes.
To increase the profit margin on imported products is quite often more complex than it might look at first sight. Nevertheless, applying an adequate management of the purchasing process is fundamental to optimize the investment made and our integral sourcing service can surely help you with it!