Margin Makeover

To maximize margins, focus on products with higher markups

By Andrea Hill

(Originally Published by MJSA May 2024)

Show me a business owner who is laying it all on the line—putting in the hours, the creativity, and the discipline—and still struggling, and much of the time, margin erosion is to blame. Usually, the erosion is a steady drip, drip, drip of decline, not obvious in year-over-year comparisons, but glaring when in a three- to five-year trendline. And because profit margins provide the financial resources needed to invest in a business—from hiring talent to buying inventory to upgrading equipment and technology—the knock-on effects of margin erosion seep into every nook and cranny of a company.

Maximizing margins can be tricky, particularly in this era of inflation and shrinkflation. But by strategically focusing on items with the potential for higher markups, you can increase cash flow, reduce pressure, and return to focusing on competitiveness and growth.

Analyze Your Margins

The starting point for this work is to do a deep margin analysis, so you know your benchmarks. (The true starting point is using processes and systems that give you clarity about the actual cost of producing products, but that’s another article.) So, we’ll jump to the analysis.

Look at your margins by item, by collection, and by category. Once you know where your lowest margin items are, not just individually but in groups, you have your starting point. Lifting the lowest margin categories and collections is the fastest route to better cash flow.

Once you’ve identified your lowest margin categories and collections, it’s time to look for opportunities. Start by identifying any items in the group that consistently sell at full price and/or that have the highest markups compared to other products in the same group. Highlight these hero items so you can refer to them easily.

The next step is to look for items where the price is lower than it needs to be—items that are similar to your hero items (which don’t have much competition), are lower than competitor prices for similar items for no good reason, and could bear a price increase without triggering much attention from buyers.

Next, make the commitment that any time you decide to reduce the price of a product but aren’t able to simultaneously reduce its cost by a relative amount (which would preserve the margin percentage if not the dollars), you will compensate by raising the margin of a comparable-volume item by a similar amount. There’s no getting around the fact that sometimes competitive pressure forces our hand on price, but that price-cutting should always be accompanied by margin-protecting activities.

Maximize Your Margins

So that’s the preventive maintenance and remediation aspect of margin management. Now let’s look at a few strategies to make it easier to charge higher prices overall.

The first step is to streamline your supply chain. Strong, collaborative relationships with five or ten suppliers will give you more margin control than loose, transactional relationships with a few dozen suppliers.

Next, consider your target or ideal customer. What are their price point preferences, and more importantly, what is their price point tolerance? If your ideal customers’ price point preference is $500 to $525, there will be more tolerance for tweaking a lot of margins in the $300 to $450 price range than for larger tweaks in the $600 to $700 price range—and you’ll likely get more bang for your buck in terms of volume.

Be sure to emphasize value over price in all your messaging. Highlighting craftsmanship, materials, innovative solutions to tricky problems, technical support and advice, or truly excellent service will keep customers’ attention on more qualitative aspects of your business, which always bolsters margins.

You may be wondering why I’ve not mentioned competitive analysis. Knowing what your competitors charge for similar products is important, but this aspect of pricing is given far too much attention relative to other pricing strategies, resulting in an industry that is increasingly commoditized. 

You need more tools than competitive analysis in your toolbox. Add these margin increasing practices to your own business, observe the results, and refine over time. There is no better way to get off the cash-flow hamster wheel and onto solid, profitable ground.