Three Ways to Boost Your Gross Margin – Week 5

On financial television shows like Shark Tank, we often hear a small bag of financial terminology thrown around. From plain old sales figures to equity and royalty percentages, there’s a small range of figures discussed – but it seems that the most famous of them all is the “gross profit.” That is, how much money does your business make after selling a product but before paying overhead expenses? And while the dollar amount in question is called the gross profit, the percentage of profit is referred to as a gross margin. For instance, a business with a gross margin of 35% when selling a candy bar to a customer for $1 will make 35 cents on the sale, while 65 cents will go towards the cost of producing the candy bar. Clearly, the greater the gross margin, the better-off a business will be. But how can we reduce our product costs to achieve such a goal? In the rest of this article, we will examine three (of countless) advantageous ways that help a company boost its gross profit.

1. Don’t be afraid of efficient tools and technology

It may sound like an obvious solution, but the potential for productivity gains when upgrading the processes used to create products is massive. Furthermore, many entrepreneurs (and employees!) tremble when someone suggests upgrading or making changes to an existing system. This is often because the current system is well-known to the operators, while a new system introduces change and brings people out of their comfortable patterns. Neither of these fears should stop a savvy entrepreneur from rocking the boat and improving a process. The payoff could result in very big gross margin improvements.

2. Train employees on “best practices,” but encourage new ideas

Many companies have training materials known as best practices that relate to the specific activities involved in completing a specific task. These best practices are often created from years of industry knowledge, tests, and data that all converged on the most efficient way of completing a task with high quality. And while existing best practices are a great tool in an entrepreneur’s efficiency-boosting arsenal, we shouldn’t be content with them. Who is to say that an even better best practice couldn’t be developed by one of your employees? Fresh ideas are out there, they merely need to be recognized and implemented.

3. Examine industries outside of your own to gather out-of-the-box solutions

It seems that there is an unspoken rule in many businesses to either look within their companies for solutions or look to copy the solutions and techniques of their competition to solve a problem. But playing the copying game can only get a business so far. To truly gain significant competitive advantage and boost gross margin (especially to boost gross margin over that of a competitor), a business needs to have channels pulling information from many sources. Like a tree pulls nutrients through countless roots, so should a business be open to drawing information from different (and often completely unrelated) industries in order to create something truly revolutionary.

What did you think? Leave some feedback! :)

9 thoughts on “Three Ways to Boost Your Gross Margin – Week 5

  1. For the last issue (looking outside) I think of Internet companies. For a while they were dot-bombs. Then “Internet Darlings”. Then “unicorns.” Over and over business has tried to label Internet-based companies and “not real” and thus not worth learning from. Now all we hear about is turning your business into a platforms. Just like we have Windows, iOS, Android, Facebook and Amazon platforms.

    And they need to focus on their customers. And all those Internet companies are all about the customer and meeting customer needs. Finally it seems that the rest of business (ok, maybe not the banking industry and airlines) is ready to listen to Internet companies. Perhaps the high valuation was the reason Internet companies finally achieved some respect from the rest of the business community.

  2. I love this! I see so many people and businesses that stay in their ways because they are afraid of change. But, you know change is always a good thing, we may not realize it at first, but it is. I love to think out side the box, what can we think of that will make us and our company better? I have a story: I’m currently teaching a online slideshow marketing class to small business owners. One student is in this class because she knows she needs to reach more people for her husband’s business than what they are currently doing. Her husband has been doing business the same way for the past 20 + years, and yes it’s working, but could you have more business if you tried something different? YES! Her husband likes traditional ways of marketing – phone book, tv, newspaper, but she is trying to expand her knowledge of new marketing ways and together they just might get a much bigger audience. So, you have to try different things if you want more and different results!

  3. Austin,
    This is a great blog and yes, I do feel like any company new or old can and should benefit from changing times. The more years I am here on earth the more drastic and fast paces I see ideas and ways of doing business changing. I feel before internet advertising was tweaked here and there but not since Radio & TV have there been so many changes with the internet. Exiting times for all who keep up and that is why fresh young blood introduced into a business can be good at times.
    Mary

  4. Austin,
    There is nothing constant but change. Gross margin and the more of it helps businesses to grow and create change. Using all your suggestions can help those industries with tight gross margins to begin with. I do think entrepreneurs are not afraid of taking your suggestions to increase the gross margin, but the people that work for them may not be comfortable with the change especially if they have had success in the past.
    Cece

  5. Austin, I enjoyed your views on not continuing as a company to copy other companies when it comes to figuring out solutions. I do believe you have to have a multitude of ideas and balance all of off them to come with the right decision.

  6. Hi Austin,
    Another way…and I know this is the “dirty” term…move production out of the US. I think of companies like Fender and Ibanez that use a pretty cool model. They are able to produce guitars for the masses because they have their entry level models produced in Mexico and Japan, respectively. They also produce guitars in the US, but charge a premium on those for (1) being made in the US and (2) being their top of the line models.
    Best,
    Alex Wiseman

  7. Austin,
    Technology is taking over – it scares me. lol My children knows it quite well; but, once I learn different techniques – it really do save on time and enhance different projects.
    Thanks for sharing

  8. Hi Austin,

    Your suggestions are wonderful. I’m particularly fond of #3. I think benchmarking other businesses, especially those outside your industry, can be a great way to find new ideas and opportunity for growth.

    -David

  9. As a compliance officer, I am travel often to workshops and conferences. One of the highlights is finding best practices or nuggets that help make my job more efficient or help to product a more compliant outcome. Each year, I find some knowledge or practice that can be added to help my area.

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