How to Increase Business Profit: 12 Proven Strategies That Actually Work

Most business owners are focused on revenue. Fewer are focused on profit. That explains why so many businesses with healthy revenues are nevertheless perpetually broke at the end of the month.

The thing is, a business with a turnover of $2 million with a 3% net margin keeps less money than a business turning over $600,000 and an 11% margin is objectively not as good as a small business, which probably carries less risk and fewer employees.

Increasing profits will typically not be the result of a single decision. It’s more likely to come from a series of small steps — a 3% increase in prices, a reduction of 5% in costs, and some optimization of the production process. A few such measures, and even if they only seem to bring moderate results, when summed up, they will give you excellent results.

This article lists twelve proven ways to increase profits in any business, ordered by priority.

Understand the Difference Between Revenue and Profit

Before you can grow profit, you have to know precisely what profit is.

Revenue is the amount of money that a company makes from selling products. Profit, meanwhile, is revenue minus all costs and expenses. As a business, you may find yourself building revenues year after year, but with profits constantly dwindling due to costs and expenses swallowing up any additional income. The most common reasons for this are overheads growing disproportionately or investment in promoting and selling new sales being heavily discounted.

There are three types of profit that every business should measure:

Gross profit is revenue minus the direct costs of producing and delivering goods. Gross profit and its corresponding margin are essential figures to determine whether the core operations of your business are profitable. Operating profit, sometimes called earnings before interest and taxes (EBIT), is your gross income minus overheads, rent, staff wages, software, and insurance. Essentially, your operating margin will show you whether your overheads are too high. Finally, net profit is your operating profit minus interest and taxes. This final figure is also frequently referred to as the bottom line, the actual profit earned by a business.

These profit indicators tell you where to act to improve profits. As you might guess, a low gross margin indicates a problem with either production costs or selling prices. Healthy gross margins but low operating margins suggest that overheads are too high. By analysing these figures, an executive can identify precisely where to cut costs or increase revenues.

Your action plan should include calculating gross, operating, and net profit margins for the past twelve months and comparing them to industry averages. There is no such thing as a “healthy” set of margins, as it depends entirely on the industry and the size and maturity of the business. Most publicly traded companies only turn over 2-3% in net profits for a multinational retailer, while a software company might expect to see 25% or more.

Fix Your Pricing First — It's the Fastest Profit Lever

Of all the levers that a company owner should use to grow the business, pricing is the most important and underrated.

The math is simple: if you have, say, 10% net margin, a five percent increase in prices will add another five percent to the margin — in other words, you’ll make 1.5x more profit per sale than before. This is an incredible effect, and the best part is that it requires no effort to achieve. Compare it to reducing costs: you’ll have to cut them by almost half to get the same result. And to grow your profits through volumes, you’ll have to do even more: either sell much more than before or increase the price, which is similar to the first scenario.

In most cases, though, increasing prices is not a problem — the only reason why owners don’t do it more often is because of the fear to lose customers.

And in most cases, this fear is unjustified.

Unless you deal with something truly commoditized, most of your customers will not abandon you for the mere reason of you raising prices. Especially if you have transparent costs, made a considerable upgrade to the product/service, or simply priced below the market. Even when you do, it’s a good idea to properly explain the changes to your customers in advance.

A few ways to do it can be differentiating your offerings (so that some of them are priced higher but provide more value), increasing the prices for the most popular products/services (which are also the most needed by your customers) and, in case you provide services, double-checking how much time you actually spend on each project vs. what you bill for it. One of the most widespread consultant/marketing/designer/construction industry problems is sub-cost pricing that ultimately makes them underpaid for the work they do.

Go through your catalog and find your three most popular services or products. Calculate how much you earned from them on average during the last year — if you haven’t increased prices in more than a year, start working on a new price list.

Focus on Your Most Profitable Customers

The Pareto principle applies to almost any customer base: 80% of your profit is generated by 20% of your customers. The strategic question is – are you able to identify your 20%?

Build a portrait of your typical high-value customer. Focus on what industry or demographic group they belong to, how they found you, what they buy and how often, and why they chose you over competitors. After creating a portrait, you’ll be able to both better serve your 20% and find new customers like them.

The same goes for the “unprofitable” tail of your customer base. Who among your clients demands the most by your resources, drags the most through the production or support process, and pays for it less? The gentle killing of such “customers” usually gives a significant increase in profits due to both the reduction of costs and the release of capacity for higher-value customers.

Finally, retention is the customer relationship management pillar that most companies neglect. Attracting a new customer is five or more times more expensive than retaining an existing one. Even a slight improvement in retention will have a disproportionate impact on your profits.

The easiest ways to increase retention are:

• Loyalty discounts and other rewards for your best customers
• After-sales service policies that go beyond promotional texts
• Human-operated customer service, available at any time
• Cross-selling of similar or complementary products to your customers

An action item for now: sort your customers according to their profitability. Once you’ve done that, you will understand where to take your business next. If your high-value customers are not loyal, spend money on making them more comfortable working with you. If you have low-value customers who eat up your time and money, consider reducing your costs by “killing” them.

Audit Your Products and Services

Not all products in circulation are worth selling. Almost every company has a product fit for discontinuation, and many more have underperforming goods that fail to yield any profit. In most cases, such imperfections are disguised by overall high revenue, without thorough analysis on a product level.

For each product or service, calculate its margin with all expenses taken into account. This includes materials, labour, delivery, storage, possible returns, and time spent on the product or service.

Based on the calculation, sort all products into three categories:

High margin products. Thoroughly analyse what contributes to their high performance: price, ease of delivery, demand. Think about ways to increase their value: raise the price, target new markets, resell in different channels. Often, one product can address two or more needs and thus be beneficial in several areas. For example, a heavy-duty cleaner can be actively promoted in mechanics’ workshops and kitchens.

Products with average results. Try to use the insights from the high-margin product category and implement some of them in average products. Optimise production or delivery chains to make the product more affordable or more attractive. Reduce the expenditure on materials or time spent on manufacturing.

Loss-making products. Focus on eliminating these products from the sales chain. If they cannot be amended, discontinued, find alternative buyers or slash prices. All expenditure on such products is a direct loss, and every hour spent on their production is time spent on products that could bring profit.

A simple spreadsheet will help to list all products and services with their revenue and expenditures. Most business owners, upon creating such a spreadsheet, will discover at least one popular product or service that is a continuous loss.

Cut Costs Without Cutting Quality

Cost control is a prime focus for boosting profit, but there is an off-again danger that the means distort the end. The emphasis is on eliminating costs which have no value, rather than reducing overall expenditure. Areas to consider at least twice a year include:

Suppliers. Prices change constantly and long-term loyal customers often subsidise those who come later. Take out annual comparative tenders, negotiate volume and payment benefits and investigate just-in-time purchases to free up working capital.

Subscriptions and Licence Fees. There are multiple software subscriptions and they add up. Review all subscriptions, cancelling anything that is unused, negotiating downgraded packages and eliminating overlaps.

Finance costs. Take a close look at borrowings, overdrafts or credit facilities against today's interest rates. There may be considerable sums to be saved by refinancing expensive facilities.

Transaction and banking fees. Card processing charges can be negotiated and vary considerably between providers, so investigate all elements of cost.

Energy and Premises. Track and identify ways to reduce consumption while investigating whether you have excess capacity which can be sublet or downsized to reflect hybrid patterns of working.

Outsourcing or in-house? It can change as the business grows. There may be costs to consider outsourcing at five employees which becomes cheaper to source in-house at 20 and vice versa.

While there are many opportunities to save costs, beware of false economies: cutting costs which support other areas of the business will reduce, rather than increase, overall profits. Always ask yourself whether the proposed saving will have a detrimental effect on another activity and if so, whether the overall effect is still beneficial.

Increase Your Average Transaction Value

Getting existing customers to spend a little more on each purchase is one of the most effective ways to grow profits because it has minimal risk and acquisition costs.

Three main techniques can be used to persuade customers to spend more:

Upselling refers to promoting a higher-end product instead of the lower one: “For 20% more, you get the extended warranty and priority support.”

Cross-selling means recommending complementary products: if someone buys a laptop, they may also need a bag, a mouse, and assistance with setting up the equipment.

Bundling is another way to get customers to spend more by persuading them to purchase a group of connected products at a reduced cost instead of buying them individually.

However, it is essential to individualize the recommendation to make sure that the additional purchase is relevant and necessary to the client. This approach helps build trust and loyalty while increasing revenue. On the contrary, irrelevant recommendations may drive customers away, destroying the relationship and, consequently, sales.

To implement these techniques, use the current average order value or projected value. For example, if the most popular product is a laptop, design one upsell and one cross-sell recommendation and monitor the changes in the average order value within 60 days.

Improve Productivity and Efficiency

Every hour that your team spends working on unproductive tasks is an hour of profit lost to the business. The best way to increase profits in your business is to streamline operations so that you make more money without having to raise prices or cut out any suppliers.

As a beginning step, it's good to identify and understand where your time is going. Service-based businesses should look into their timesheets to understand what is driving the most hours and if those hours are billable or profitable to the business. For physical businesses, this might mean analyzing the workflow of the actual space: how far people have to walk, how long they wait at a certain step, and where the main bottlenecks are. Making slight changes to the environment or providing more training can reduce the amount of time it takes for a transaction or process to be completed and save the business hours upon hours every year.

After analyzing the operations and identifying the pain points, you can move towards taking action on:

• Allocating the team's hours better based on the most profitable products/services and clients
• Making sure the tasks are aligned with the core skill set of the employees
• Canceling out meetings and processes that serve no purpose and only take time away
• Documenting repeatable processes and tasks so that they don't rely on the skills or memory of one person

The most important step here is engaging the team in the process. The people who do the work will usually know best where the problems are without having to look at a birds-eye-view perspective. Ask your team members what seems to be the most unproductive task for them this week. Fix the first three issues that come up.

Action step: Have every team member answer this question for you this week: What task do you think is the most useless and frustrating in your weekly operations? Fix the top 3 issues that come up.

Use Technology and Automation Wisely

The right technology can increase profits in two ways: by cutting costs and by improving decision-making.

Saving costs and reducing risks: cloud accounting software saves hours of bookkeeping. Online scheduling ends the phone-tag misery of making appointments. AI assistants can now write marketing copy, summarise meetings, answer straightforward customer questions, and do a surprising amount of mundane administrative tasks that previously required paying someone to do them. Good IT practice can also protect the profit bottom-line against damaging losses: one major data loss or security breach can easily wipe a year's profits.

Improved decision-making: a CRM system shows you which customers are important and which are about to defect. Analytics and reporting tools tell you what products or channels are actually profitable, rather than just busy-work. Forecasting supported by artificial intelligence can help you plan stock lists and staffing more efficiently, and uncover wasteful activities that would never have been apparent otherwise.

Two caveats: first, that technology is only useful to the extent it addresses a particular need, and a tool that addresses your need is better than one that has a nice demo but doesn't solve your problem; and second, that any technology that touches customer data must be compliant with data-protection regulations in your market.

An action item: list your three biggest weekly time-consumers. Thirty minutes' research on each can identify an affordable automation that will save you hours. If the tool costs less per month than the wages of the person doing the task, it's a profit-centre investment, not a vanity purchase.

Optimise Your Marketing Spend

Marketing that does not generate a profitable customer is not an investment rather it is an expense. This is why many companies often waste their money by spreading the marketing budget between various channels without proper analysis to justify the decisions.

Calculate the marketing return for each channel, consider how much it is spotting you for a customer and what this customer brings in. Invest more in profitable channels and do not waste money on those that only attract customers which do not bring any revenue.

However, it is vital to remember marketing channels often work together in synergy. Your paid search marketing may have the best ROI, but if your social media and content marketing are not building brand awareness, you will soon stop appearing in searches. Always evaluate the marketing mix as a whole, not individual channels, and make adjustments in a stepwise manner rather than making all changes at once.

The action step is to analyse each marketing channel and measure the cost per customer acquired through it. Next, compare the amount to the lifetime value of the customer and reallocate the next budget according to these figures.

Plug the Silent Profit Leaks

Beyond the obvious levers, many companies have other, less flashy sources of profit drains:

Unplanned discounting. Every discounted sale directly reduces your profit by the amount of the discount. If you have a 30% margin product and you give a 10% discount, you've just sacrificed 10% of your profit on the sale. Formalize your discount policy, and make sure your salespeople understand the value proposition of the good or service you're selling, not just the price.

Late payments and bad debt. Until cash is in the bank, it's not revenue. Get aggressive with collections. Invoice customers immediately upon delivery or upon completion of a service. And if the job is big, ask for payment up front.

Waste and shrinkage. Spoiled inventory, overproduction, rework, errors, and pilferage all eat into your profit margins. It's often surprising how much waste is happening until you start measuring it. Usually there are some low-hanging fruit that can be plucked to immediately improve your profits.

Scope creep. With service businesses, especially, it's easy to fall into the trap of giving extra services for free. Always define the job clearly and get payment for any changes or upgrades.

Your action item: Take the profit leak that you think is big in your business and measure it for a month. Only by measuring can you begin to understand and improve your profit position.

Grow Sales Into New Markets — Carefully

Once your margins are healthy, growth becomes multiplicative, rather than additive. There are several ways to grow, such as entering new geographies, demographics, digital channels (if you're physical) or the reverse, and modifying your existing product to meet similar needs.

The important thing is that you should expand only after fixing your profitability, and not the other way around. Because otherwise, you will only be scaling your losses. You want to make sure that your core business has positive unit economics, so that you can scale it up to enormous sizes and still make a profit.

The thing to do now is to take your most profitable product and try to think of three different markets or demographics that would need it with little modification. Then do a small test with one of them before investing more resources.

Measure, Review, Repeat

Profit improvement is not a project with a definite end date – it is a discipline. Set a monthly pace: review your gross, operating, and net margins; monitor a couple of indicators such as average order value, customer retention rate, cost per acquisition, and revenue per employee; and evaluate if changes you make actually drive profits.

Fluctuations in numbers downwards are not failures but valuable insights that should not be ignored: a business that reviews its performance monthly can spot a profit erosion trend in weeks, whereas businesses that only do annual reviews wait too long to address the issue.

A Simple 90-Day Profit Plan

If this all seems too much – pick the plan for 90 days and begin with day 1.

Days 1-30 – calculate your three margin levels – rank first your customers and products by their profit level – take a closer look at all the recurring costs and cut the ones that feel like dead weight.

Days 31-60 – make a price change for one of your most popular products or services; launch one new upsell or cross-sell; renegotiate the two most expensive supplier contracts.

Days 61-90 – fix your three biggest internal inefficiencies; automate one repetitive task; reallocate the marketing budget according to an ROI assessment; and finally, take a snapshot of the numbers and begin the next profit growth cycle.

Final Thoughts

Improving business profit requires you to focus on the business you have – not the business you want to have. There is no magic acquisition here – just a mix of sharper pricing, right customers, and fewer costs. It means making small disciplined changes to how you run your business on a day-to-day basis to remove unprofitable activities that waste time and cash. Start with the profit review, pick 2-3 most accessible tactics from the list above (pricing, cost reduction), and let them compound for the next 90 days.