Gross Margin – Increasing your Business Margin
Simply stated, Gross Margin is the value of sales less the total cost of the product or service sold. GM is a critical number for any business. Frequently expressed as a % of Sales it can vary widely between industries.
How do you go about increasing your Gross Margin?
Two obvious ways are to increase your sales price per unit and/or decrease your cost per unit.
Less obvious ways of increasing Gross Margin are managing the mix of products or services you sell to customers, negotiating volume discounts, asking for volume rebates or other trade rebates on purchases, and periodically introducing profitable new products or services.
Many times uncovering opportunities to increase Gross Margin requires a closer look and more in depth analysis. For example, a review of all items being sold at an average price generating less than breakeven GM is necessary. This analysis can reveal opportunities with certain customers or even help decide to exit or not emphasize unprofitable lines of business.
For a quick, effective Gross Margin analysis, look at which products or services make up 75% to 80% of your total revenue. Any changes your can make to these products to increase their Gross Margin will have an immediate impact on your bottom line. Consider raising prices or reducing costs on these key products to improve profitability.
Gross Margin is ultimately the lifeblood of any business.
If you can’t generate enough Gross Margin to cover your overhead on a consistent basis you will not be successful.