Ryan Stemen, MBA

The typical route to increasing profit margins is jacking up prices while cutting costs to the core. Rinse and repeat over multiple quarters. But is that sustainable? No.

We see it everywhere though. Our favorite brands. Our favorite stores. Our favorite restaurants. They just increase prices and decrease offerings to increase profit margins.

And being laser focused on price increases and decreasing costs is only one aspect of increasing your profit margins.

What if there was another way as a business owner to increase your margins without losing or frustrating your customer base?

Start By Deeply Understand Your P&L

Before diving into optimization strategies, you need to master your company’s financial metrics. Very few people do this or know how to properly review their income statements or profit and loss statements. Instead they rush into cost cutting and optimization before fully understand the financial impact. Let’s start by understanding your Profit and Loss (P&L) statement as shown below:

• Revenue streams
  • Revenue streams are the various sources from which a business earns money. They can come from selling products, providing services, subscriptions, licensing, advertising, or other activities.
• Cost of goods sold (COGS)
  • COGS represents the direct costs involved in producing or acquiring the goods that a business sells (labor, raw material, manufacturing overhead).
• Operating expenses
  • Operating expenses are the ongoing costs a business incurs to run its operations, excluding direct production costs (COGS).
• Net profit margins
  • Net profit margin is a profitability ratio that shows the percentage of revenue that remains as profit after all expenses have been deducted.

Your profit margin isn’t just a numbers on a page – it tells a story about your business’s efficiency and value proposition.

Beyond the Price-Cost Squeeze

While controlling costs and optimizing pricing are important, truly maximizing profit margins requires a holistic approach. Below I’ve broken down how to review each aspect of your profit margin holistically in points A through D for non financial professionals and financial professionals alike:

A. Value-Based Pricing

• Understand your customer’s perceived value
• Segment your market for targeted pricing
• Package offerings to highlight value propositions
• Test different price points systematically

B. Operational Excellence

There are areas of your operational which are operating less than efficiently.

• Streamline processes to reduce waste
• Invest in automation where profitable
• Optimize inventory management
• Improve employee productivity through training

C. Strategic Cost Management

Here are some strategies for managing your costs:

• Negotiate better supplier terms
• Implement lean methodologies
• Focus on high-margin products/services
• Consider strategic outsourcing

D. Revenue Enhancement

There are strategic ways to enhance your revenue streams:

• Cross-sell to existing customers
• Develop complementary products
• Create recurring revenue streams
• Build customer loyalty programs

Measuring What Matters

Often businesses are so focused on the latest sale, keeping staffing maximized, or just keeping the lights on. They concentrate on keeping their operations open and not running at full capacity. As a result, they forget to do a high-level review of all their companies important data. Below are a few metrics of note to track on a monthly basis:

• Gross profit margin
• Operating profit margin
• Net profit margin
• Customer acquisition cost
• Customer lifetime value
• Product-level profitability

Taking Action

Business owners are people of action. They took bold leaps to open a business. They took a bold risk to bet on themselves and their business idea. Now it’s time to take even further action. Begin by taking control of your business today. Follow these simple steps to take further control of your profit margins:

1. Analyze Your Current State
   • Review last 12 months of P&L statements
   • Identify profit margin trends
   • Benchmark against industry standards
2. Set Clear Targets
   • Establish realistic margin goals
   • Create department-specific objectives
   • Define timeline for improvements
3. Implement Systematically
   • Start with quick wins
   • Test changes before full implementation
   • Monitor impact closely
4. Build a Profit-Focused Culture
   • Train team on financial literacy
   • Align incentives with margin goals
   • Celebrate margin improvements

Common Pitfalls to Avoid

• Cutting costs that affect quality
• Raising prices without adding value
• Ignoring customer feedback
• Focusing solely on short-term gains
• Neglecting employee morale

The Long-Term View

Sustainable profit margins is the way to play your cards as a business owner. Don’t aim for great profit margins in Q1 or year one. Instead, look for ways to grow those margins over long periods of time. Below are few points to consider over the long term horizon of your business to improve and grow your profit margins:

• Build strong customer relationships (repeat customers)
• Invest in innovation each year
• Develop competitive advantages
• Create efficient systems
• Maintain quality standards

Stop thinking about margins like everyone else. Start building a business that’s profitable because it delivers real value. Focus on steady improvements, not quick fixes. That’s how you build a business that lasts.

Remember: Anyone can squeeze extra margin for a quarter or two. The real winners build businesses that stay profitable for decades.

Where will you focus your attention to be laser focused on your profit margins?