How Do You Improve the Profitability of a Small Business in 15 Ways

How Do You Improve the Profitability of a Small Business in 15 Ways

January 12, 2022
(Reading time: 6 - 11 minutes)

Today’s business climate is crazy. As of the writing of this post, the business news channels are chopped full of lingering labor shortages, a new COVID-19 variant making its way around the world, and more and more talk about lingering inflation.

In February of 2021, The Small Business Credit Survey (SBCS) 2020 survey was released; they said that “Small businesses continue to face significant challenges amid the COVID-19 pandemic, including weak demand, heightened expenses, and limited credit availability.”

Here are a few key statistics from that report:

  • Most small businesses reported declines in revenues and employment in the 12 months prior to the survey. 78% of firms reported decreases in revenues, and 46% reduced their workforce. If you compare that to 2019’s results, you will find that a larger share of businesses reported revenue growth to 35% from 28% the year before. 
  • 57% of small businesses characterized their financial condition as “fair” or “poor.” 
  • 95% of small businesses reported that the pandemic had impacted their business.
  • 53% of businesses surveyed expected total sales revenues for 2020 to be down by more than 25% because of the pandemic.
  • Also, notable small businesses at the time of the survey anticipated a challenging 2021. Many expected a decrease in revenues as opposed to an increase.

(Source: Small Business By Federal Reserve Banks: Report on Employer Firms)

Now fast forward to nearly a year after the publish date, and we still see small businesses struggling. In September of 2021, Goldman Sachs’ released their 10,000 Small Business Survey: The COVID Surge is Slowing the Road to Recovery. It showed that 86% of small business owners were already struggling with inflation. The report also uncovered that inflationary pressure was hammering many small businesses. 84% of small business owners stated that they had already seen an increase in operating costs. While 74% of the survey respondents said, their business’s financial health has been negatively impacted by inflation. Echoing what was seen in the 2019 SBCS report.

A MorningStar report provided by MarketWatch reporter Jeffry Bartash said that “A closely followed gauge of small-business confidence [covered by the National Federation of Independent Business (NFIB) ] slipped by 0.8 points to 98.2 last month [October]… it marks the lowest level since March [2021].”

It seems that much of the issues are being attributed to small businesses’ inability to get materials or sufficient supplies on time, AKA supply chain issues. Many business owners have been forced to pay significantly higher prices due to increased competition for supplies if they can even find them.

All of these factors have set us up for the dreaded word inflation. Therefore the question becomes how do you improve the profitability of a small business in the face of all these challenges and, more importantly, in the face of inflation? Well, here are fifteen ways to increase profit in a small business.

How to Increase Profits for Small Businesses

Engage With Existing Clients

You may or may not have heard this, but it can cost you five times as much to acquire a new client rather than retaining an existing one. And that’s not all:

  • Increasing client retention by 5% can increase profits from 25-95%
  • The success rate of selling to a current client is somewhere around 60-70%, whereas the success rate of selling to a new client is 5-20%.
  • Loyal clients are 5x as likely to repurchase, 5x as likely to forgive, 4x as likely to refer, and 7x as likely to try a new offering. (Source: Temkin Group)

What all that means is that the dollars you invest in marketing should be directed toward your existing clients if you want to have a better ROI. Now you still need to keep reaching out to prospects and new clients but never undervalue existing clients in your marketing plan.

​​Communicate With Clients

Now more than ever, clients expect a relationship with the companies they do business with. Businesses can gain valuable insights about clients through their interactions.

Because communication is and should be a two-way street, don't only ask for feedback. Try to provide something helpful such as free advice or discounts for your clients' valuable feedback. While there are numerous ways to build a relationship and communicate with your clients, consider the following:

Use a Loss Leader Item or Service

A loss leader item or service is a basic or initial product or service that gets a client in the door or hooked on your company. These are often base-level products, a no-frills service, or the first in a series of products.

You can entice new prospects by putting a loss leader item or service at a permanently lower price. Then, once they are a client, you can upsell or cross-sell your goods or services. Regardless of the strategy you choose, it all starts with giving a client a good deal on the first item.

Reduce Operations Costs

You probably knew that something like this would make this list. I am happy that I didn't disappoint. While increasing your revenue is the obvious way to more profit, however, lowering expenses can make your numbers jump as well. If you are really looking to cut costs, go through all your day-to-day business expenses, such as subscriptions, software, supplies, etc., and see if you can buy in larger qualities and store things software subscriptions you no longer need or use.

Other places you can look at cutting costs are: 

  • Suppliers: Are you getting the best price from your vendors? Is it possible to negotiate better conditions, or do you need to switch? Can you get better pricing by combining your vendors? Can you purchase "just in time" to make better use of your cash flow? Should you buy in bulk and store so you can leverage shipping and quantity pricing?
  • Finance: Do you need to review your banking options? Is your bank offering you the most competitive options and terms available? Are you using any loans and overdrafts you have effectively?
  • Premises: Have you examined whether you are getting the most out of your building(s) or space? Is there a more efficient way to use it? Could you sublet some unused space?
  • Production: Have you looked into whether you can lower the costs of your materials, maximize waste or cut it completely. Can you adapt your production processes, so they are more streamlined?

Keep “This Is How We Have Always Done It” In Check

In my opinion, one of the most detrimental phrases in the business world is “this is how we have always done it.” While the way you have always done it might be okay, you should periodically evaluate to see if there isn’t a better and more efficient way of doing things.

Increase prices

Businesses are generally reluctant to raise prices because they risk upsetting clients. However, if you increase the prices of your services within the 5-10% range, you shouldn’t face any significant market resistance. If you provide quality services with excellent customer service, your clients won’t mind you increasing prices slightly. Just make sure that if you are increasing prices, it isn’t a regular occurrence or that you’re not increasing prices more than 10%.

Keep Your Staff Happy and Informed

Saving money and improving your profitability is a group effort. You should try to keep your staff happy,  informed and make it a point to improve the bottom line a company-wide effort. 

You will also want to think about how hard, how much time and money it takes to hire and train staff. If you can avoid the cost of this by doing everything, you can keep your existing employees. Over the long haul, having engaged, knowledgeable staff will increase your bottom line.

Expand

Business expansion and growth should always be in the back of a business owner’s mind. You can expand by developing new products and services. This will obviously require spending money first, but it will be an investment in the future profits of your business.

Additionally, make sure that you are keeping an eye on the competitors. You can find good ideas for new products by looking at what your competitors are selling and what they are doing great at. Make sure you don’t duplicate, rather add to an existing idea if you want your product to succeed.

Encourage Referrals

The only thing better than being able to tell a prospective client how fantastic your small business is is when one of your satisfied clients is the one spreading the word. 83% of buyers say that they trust recommendations from people they know.

Build Reviews & Word-Of-Mouth Promotion

A simple thing you can do to increase conversions and sales in prospects is to respond to previous clients' reviews. Buyers consider businesses that respond to reviews to be 1.7X more trustworthy than companies that don’t.

Therefore you should encourage reviews by making it easy to do so. You can use online services to send your clients an email or text message with a request and a link making it super simple to leave a review. Also, this simple step can increase your chances exponentially.

Automate Business Systems

One way to reduce costs and improve efficiency is by automating business processes. A good software or cloud-based software service can help with everything from inventory to payroll, giving you and your staff time to work on tasks that help you grow your business.

Consider automating the tasks such as these:

  • Lead generation
  • Appointment scheduling
  • Employee scheduling
  • Employee benefits
  • Background checks
  • Payroll processing
  • Bookkeeping

Follow the 80/20 Rule

The 80/20 rule says you should concentrate the most critical efforts on your most valued clients. The idea is that 20% of your clients typically bring in 80% of your income; therefore, these are the ones you should focus on.

On the other hand, 20% of your clients frequently present 80% of your problems. Try to identify these problematic clients and get rid of them to free up your time to devote to your better clientele.

Improve Your Website

Prospects will visit your website to learn more about your small business before doing business with you. Could you enhance their experience and gain their trust so they would be more inclined to use your services? Your website should do these four things:

  • It should explain who you are and what you do
  • It should entice potential clients to hire you
  • It should make it easy to learn about a service and contact you to perform it
  • It should have a way to contact you with questions easily

Once you have the above in place, you can start to think about doing an SEO (search engine optimization) audit. An SEO audit will help you better understand how Google, Bing, Duck Duck Go, and other search engines see your website. You may need to make some SEO-related adjustments to your website in order for it to show when someone searches for your services.

Increase and Decrease Your Advertising Costs

You may be thinking I am crazy by telling you to increase and decrease my advertising costs in the same breath. While you may be hesitant to spend money on advertising, it may be what you need to do to increase profits. The trick is to know where to decrease your advertising costs. You need to be able to track what is working and what isn’t. Unfortunately, many traditional advertising methods don’t offer the tracking that digital advertising such as pay-per-click (PPC) ads gives you.

Invest in Digital Marketing

With effective, low-cost digital marketing, you can broaden your pool of prospects to encompass the whole world or focus on your service area. While yes, this does involve investing money on your website, search engine optimization, email newsletters, content marketing, and social media marketing, it can be one of the most effective and sustainable forms of marketing.

Bottom Line

It is now more important than ever to be creative and innovative in order to have a profitable small business. My hope is I have provided you with a comprehensive list and some actional tips on how to increase profits in your small business.

Chad Treadway

Written by:  |  January 12, 2022

Chad is our business development manager. He will help you survey your business needs, ensuring you are educated on your options before suggesting any solution. Chad also has several certifications through HubSpot to better assist you with your internet and inbound marketing.

See Chad Treadway's' bio: cubecreative.design/about/chad-treadway