It seems like such an obvious thing to say that I’m a little embarrassed to be writing about it. But young entrepreneurs — including myself at one point — settle for razor-thin profit margins all the time. “If it works for Amazon” is a terrible business plan.
As a new entrepreneur, you put a lot of pride in your business and want it to grow quickly. This typically means revenue. But because you don’t really know what works yet, you throw a bunch of stuff at the wall and see what sticks. Before long, the cost of running your business adds up, and you think, “Wait a minute. Shouldn’t I be making money with this?”
The best thing a young entrepreneur can do is start his business focused on creating high profit margins.
Why High Margins are Key
High profit margins allow you to build a business that actually has cash flow. When you have high margins, you can offer stellar customer service. Need to accept a few returns? That’s not a problem when your margins are high enough to handle it.
Most importantly, though, high profit margins allow entrepreneurs to expand quickly. Growing with low margins is impossible because you won’t do everything right. (Trust me, I know.) Marketing strategies will flop, customers will have issues, and service will be terrible. Razor-thin profit margins can’t support these messes when it all hits the fan.
When you try to expand with a low profit margin, you have to beg anyone who will talk to you — friends, family, professional financiers — to spot you some cash. In return, because quick growth is risky, they will want 50 percent or more of your business.
In contrast, when you’ve already built in high profit margins, you can handle the ups and downs that go with expansion — independent of any expensive cash influx.
How to Start with High Margins
The best way to develop high margins is to build them in from the beginning. When setting up your product or service, never be the low-range or even mid-range option. Always shoot to provide the premium because that’s where the most profit comes in.
Need to justify the higher expense? Simply offer more value.
For example, let’s say you want to sell simple yoga mats that aren’t much different than what is currently on the market; however, you also want to become a premium provider without adding a lot of cost to your own business.
All you would need to do is find a yogi and pay him or her $50 to record a series of yoga classes. With each yoga mat you sell, include a card that invites customers to “unlock” a bonus “online yoga membership.”
You’ve now added $20 to $40 in value per order, but only spent $50 in doing so.
Think about what your customers want, and deliver it to them in a way that provides tons of value. You create high margins and turn your customers into raving fans because they get so much value from your product.
Increase Your Margins Right Now
So, what if you’re already in business but didn’t have the benefit of this awesome advice when you started? There are still plenty of ways to increase your profit margins within your existing business.
Complementary product or service: Adding something complementary, but inexpensive for you, increases the value of your product or service. You will set yourself apart from competitors and be able to charge a premium price.
Better design or packaging: Whether it’s your website or product packaging, better design communicates better quality. Have you noticed how store brands are slowly looking more and more like name brands? Investing in great design will communicate that you are a luxury product worth the premium price — even if you’re smaller than all your competitors.
Better marketing: Better marketing beats a better product every time. When you have great marketing, you get in front of more customers and make more sales. Then you can pay attention to your new customers and tweak your product to become exactly what they want. Gaining a basic understanding of copywriting and advertising will put you way ahead of most other entrepreneurs.
The idea of high profit margins seems like a no-brainer in business. Aren’t you in this to make money in the first place? Still, entrepreneurs tend to get excited and chase after high revenue instead, which doesn’t always translate into profit. The best thing an entrepreneur can do for his or her business is focus first on high profit margins. They simply make things more fun — which is always a sign of success.
Matt Clark is a serial entrepreneur, author, speaker, and health and fitness enthusiast. He is an entrepreneurial thought leader, and founded a multimillion-dollar product distribution business enterprise. He welcomes anyone to reach out to him on Twitter, LinkedIn, or Google+.Suscribe to the podcast