The main goal of a company is to make a profit, and there are numerous ways a company can approach this goal. So, what are the profit strategies?

Depending on what is affecting profits, management could focus on pausing production and proceeding cautiously, divesting a small or larger part of the business, liquidating non-key assets, focusing on a quick or long-term turnaround, or focusing on getting the business stable before making more drastic decisions.

In all cases, a wise course of action is to thoroughly investigate the cause of your dip in profitability and what change makes the most sense to turn things around. Consider whether your goal is to move the profit from a loss to a gain as quickly as possible or whether you desire changes that will offer growth into the future.

Let’s focus first on the profit strategy and then compare that against some alternatives. We’ll then discuss ways to increase your profitability, plus other cost items to consider when trying to move that bottom line in the upward direction.

Profit Strategy: Meaning

When an organization deploys a profit strategy, it aims to maintain a profit by any means possible. This can be done through a variety of activities.

• Cutting costs related to materials, production, business processes, sales, and people.
• Reducing investments by selling off assets
• Raising prices of products and services
• Increasing productivity
• Adopting any other method to overcome temporary difficulties.

Profit strategies are often short-term fixes in response to temporary problems. These problems could include the following:

• Industry downturns
• Bad market conditions
• Inflation
• Government policy changes
• Pressure from competition

These strategies are usually not sustainable in the long run but are implemented to maintain the bottom line. 

When employing a profit strategy, the goal is to stay above water and turn those numbers around as quickly as possible. If new technology will affect profitability in the long run, this is not considered in the profit strategy. The focus is on using what you have. Once the bottom line shows a profit again, improvements to the process and equipment can be considered.

Assumption

The profit strategy assumes that the difficulties that led to the downturn in profitability are short-term. Thus, the decisions are designed to get at the problem and turn it around quickly. An organization must consider a different strategy to sustain business growth if the difficulty persists. Damage to the integrity of the business is a risk if this strategy is used for a longer period of time.

Limitations

The profit strategy has limitations in its execution:

• The profit strategy will only benefit the company in the short term.
• If price raises are used to increase profits, there is a risk that customers could be alienated or choose another supplier if the new prices persist long term.
• Cutting costs could have other consequences on the quality of products.
• Customers could also leave the company due to the lack of focus.
• Customers could lose confidence depending on the actions related to the profit strategy.

Profit Strategy Vs. Revenue Maximization Strategy

While the profit strategy is focused on profits, the revenue maximization strategy is based on achieving high sales volume. Instead of increasing prices to make profits, the focus is on decreasing prices to bump sales. The result is hopefully an influx of profitable customers. The challenge later is whether the customers will remain when the prices are raised or whether the company can maintain the lower prices and still make a profit. Business models are based on a direct correlation between sales and profit.

Profit Strategy Vs. Growth Strategy

Another strategy for increasing profits is the growth strategy, which differs significantly from the profit strategy. The first significant difference is the growth strategy is a longer-term plan focusing on the growth and expansion of the business. Contrary to the profit strategy, a growth strategy capitalizes on new investments and isn’t afraid to spend money on assets or inventory. 

The growth strategy believes in spending money to make money and may require extra funding. It may take more time to turn a profit, but the company will be in much better shape for it.

Ways to Increase Business Profitability

Before things get worrisome, any business owner should study their financial reports and forecast how the business will perform. There are several areas where a business can adjust income or expenses to increase profitability. 

Manage Your Costs

Several key cost areas affect your bottom line. Adjusting any of these will affect profitability.

• Suppliers – Inventory and supplies can be a big part of your production costs. Periodically, check to see if you are getting the best deal.
• Finances – Interest rates and finance charges can be costly. Ensure that you are getting the best terms from the bank. Additionally, only use loans and overdrafts when necessary and understand the costs associated with both.
• Property – Ensure you use your property, plant, and equipment wisely. Rent out empty warehouse space or sell equipment that is obsolete or not being used.
• Production – Look for efficiencies in your process. Can you use cheaper materials without sacrificing quality? How much waste are you generating from your process? Can you produce more in less time by eliminating unnecessary steps?

Analyze the cost of each activity and determine if there are cuts you can make to trim costs.

Review Your Offer

Adjustments to the products and services you offer to clients can increase profitability.

• Review your pricing to ensure that it is competitive with the market. Research other offers on the market to determine your product’s advantage and adjust your price accordingly. Annual price increases are also standard if they are communicated in advance.
• Analyze your customer base for your true target audience. Concentrate your sales on those products or services that generate the most income. Remember the 80/20 Rule that says 80% of your profit comes from 20% of your sales.
• Study your best customers and analyze why you have an advantage over your competition. Determine if there are other problems you could solve by offering complementary products. Upgrade your existing products and sell them for a higher price. Diversify your product line.

Buy More Effectively

Negotiate with your suppliers to ensure you are getting the best deals. Check other suppliers on the market to see if you can get your raw materials at a better price. If you see a better deal, return to your current supplier to see if they can match the price.

If you’ve been a loyal customer for a long time, ask for a better rate. If you are a small business, look for others you can partner with for a larger order that might qualify for a better per-unit rate. While volume discounts are often cheaper upfront, consider the costs of storing and managing inventory onsite. 

Cutting waste can save money, contributing to profitability. Waste can come from many areas besides materials. 

• Unused space or equipment could be sublet or sold.
• Turn off your equipment when it’s not in use to save power costs.
• Purge surplus supplies that you no longer use, such as extra phone lines or computers.

Concentrate Your Sales Efforts

Earlier, we mentioned the revenue maximization strategy, where a company focuses on sales volume. One does not have to be in trouble to concentrate on sales—this should be a continuous effort. There are a few ways to approach increasing sales.

• Concentrate on those customers that have the highest sales and the highest profit. Nurture these customers and determine if you can upsell, cross-sell, or create a new product or service that solves an unmet need.
• At the same time, look for opportunities to expand your customer base. Is there a new market that would benefit from your offer?

Expand Your Market

Spend time researching other industries and markets to see if they would benefit from your product or service. If you sell a basket for tools, could that also be used as a product for home organization? 

Use social media for ideas and to do some research into new markets. If there is potential, carefully analyze what it would take to adapt and market the product to new customers. This analysis includes exploring the new venture’s resources, risks, and profitability. Consider partnering with another company that is entrenched in the new market.

Strategies For Managing Your Profit-Drain Customers

Customers fall into three main profit categories:

• Profit peaks are your best customers—bringing in higher revenues and profits
• Profit drains are customers that bring in more revenue but low profit
• Profit deserts are customers that bring in low revenue and low profits

Profit increases can occur by focusing on the best customers and finding a way to turn around those who are drains and deserts. Here are a few ways to create more profit-peak customers.

Reduce Costs On Both Sides

The first step to turning around profits is identifying customers bringing in less revenue and fewer profits. Often, these customers purchase a lot less volume than your best customers. Volume purchases may be profitable, but purchasing a single item may not have a slim profit margin.

The solution may be to cut costs in the production of your items. Looking at every step of your process, from the cost of supplies to the production process, you could find cost-cutting measures to increase the per unit profit. Don’t forget to look at external factors such as restocking fees and bonuses.

Assign the Right Teams to the Right Customers

A second method to lowering costs involves building relationships with customers that don’t drain profits. Studying transaction-level metrics help identify savings that are outside of raising prices. For example, a company might sell to a customer to get them in the door. The assumption is that the customer will increase sales, becoming more profitable.

Another approach is to look at how the customers are ordering products. For example, shipping costs can skyrocket if free shipping is offered and the customer orders items at the last minute. Perhaps offer incentives to order during non-peak times.

Comparing the practices of high- and low-profit customers can provide insight into which items to focus on.

Consider Three Cost Items

Three cost items offer opportunities for profit improvement:

1. Order Pattern – this factor determines when and how often a customer reorders a product. If all customers order simultaneously, production must work overtime to fulfill the orders on time. If customers consistently wait until the last minute to order a product, the rushed shipping of products can reduce profitability.
2. Product Mix – this factor looks at the net profit of each product in the company’s offerings. This way, sales managers can determine which products to focus their efforts on and which ones to offer as an add-on or loss leader. A profit catalog can track the metrics of each product or service. When the company’s profits decrease, selling the right product mix can offer more guidance.
3. Order Channel – this factor looks at how products and services are offered to customers. Selling items online cuts out some middle salespeople and offers a quick warehouse-to-customer delivery time. This can be a significant cost saving over a salesperson’s in-person visits. On the other hand, a salesperson can provide more personal service and encourage the customer to buy more. An optimal strategy is to use quick order channels for profit-drain customers and concentrate efforts on profit peaks.

The Bottom Line

Profitability is the culmination of many factors. When facing a downturn for whatever reason—internal or external—it’s natural to want to follow a profit strategy and cut costs wherever possible. Sound financial advice is to evaluate all components of your business. A growth strategy combined with cost-cutting measures may benefit your business in the long run without fracturing your customer base or infrastructure. 

The best plan is to plan ahead with knowledge of your customers, industry, production process, and available strategies to handle a potential loss. For more valuable information on running your business and keeping more of your wealth, click on our extensive library of financial articles. Here’s to a profitable future.