In my last post, I went through 16 powerful revenue growth levers for your business. Now let’s turn to gross margin growth levers that ultimately drive more profit to the bottom line.
What is gross margin exactly? It’s revenue minus your cost of goods (or services)—essentially everything that it takes to produce the thing you sell.
Cost of goods/services would include product cost, people who perform services, software and equipment required to get the work out the door, etc.
Cost of goods doesn’t include operating expenses like rent, business insurance, legal and accounting fees, etc.
So why is increasing gross profit important? It’s the number one way for you to increase net profit.
Think about it: you can’t change your long-term lease agreement, or do too much to impact the price you have to pay for things like insurance, loan paybacks, administrative, or utilities. But you have a lot of power to impact how much you pay to produce the thing you sell. Let’s take a deep dive into 7 levers that can substantially impact your gross margin.
1. Re-examine and Re-negotiate Contracts
Busy business owners often default to what’s in front of them, because it takes time and effort to shop around and skill to negotiate. But consider that every dollar you save by shopping your vendor contracts goes directly to your bottom line, and suddenly making the time and acquiring the skill set can be very lucrative.
For example: A retailer re-bids vendor contracts every year for inventory.
2. Establish a Salary Cap
This lever comes from “Simple Numbers, Straight Talk, Big Profits!” By Greg Crabtree. Essentially you determine anticipated revenue and non-salary costs, then calculate your “salary cap” at a certain profit margin.
For example:
$1 million revenue
Minus $350K non-salary costs
Minus 20% desired profit margin ($200,000)
Equals $450,000 salary cap
Then look at your actual payroll and see if and how you can cut it to meet the cap. Crabtree points out that if the NFL can do it, small business owners can too.
3. Delegate, Automate, Eliminate
Establishing a salary cap begs the question: “How do we reduce headcount costs without sacrificing quality and service?” This is where delegate, automate, eliminate comes in.
Delegate: Company-wide, push down tasks to the next level. Business owners shouldn’t be doing their own books; they should be reviewing financial reports.
Automate: Leverage software to automate manual tasks. A salesperson should have pre-built cold outreach cadences that send and unsubscribe automatically.
Eliminate: Everyone in the company does work that is neither important nor urgent. Take a quarterly inventory of what falls into this category and simply…stop doing it.
4. Offshore or Nearshore
Nearly every industry is experiencing a painful talent shortage in the wake of Covid and the “Great Resignation.” There’s incredible talent available overseas available at a fraction of the cost, which can solve both the hiring crunch and lower your COGS while maintaining a high standard of delivery for customers and clients.
This is not to say that offshoring doesn’t come with its own pain points, including cultural and time zone differences, but it can be a great tool in your gross margin toolbox.
For example: A real estate broker finds themselves mired in scheduling and paperwork-chasing. She hires an executive assistant from the Philippines with excellent communication skills to take over these tasks so she can focus on closing sales and lead generation.
5. Outsource
Sometimes we do work internally that can be done at a fraction of the cost and at a higher quality than can be done in-house. Develop a strong partnership with key providers who can compliment and supplement what you do – and you can choose whether to white label or have them work directly with the customer as appropriate.
For example: A marketing agency produces a few videos a year and is debating hiring a full-time videographer so they can confidently offer the service and know it will be delivered. What if they changed “on staff” to “on call” and outsourced to a trusted partner until the book of business is built up? They would eliminate the high cost of a FTE and the risk associated with the sporadic nature of the work.
6. Performance Pay
Tying income to results aligns the objectives of the company and the team member. It’s widely documented that employees on performance pay are more efficient and hungrier for work.
You can start with a guaranteed base that’s at or near what they’re making now and structure the incentive on top of it, so there’s only an upside for your employees.
For example: A digital advertising agency uses a “pay for performance” model with clients, only charging when they bring in leads. Their account managers are similarly incentivized, receiving a base salary plus 20% of all revenue generated from leads they’ve brought in.
7. Eliminate or Revamp Low-Margin Products and Services
When was the last time you evaluated gross margin by product, product line, service, or service line? Unless you offer a single product or service, you’re almost definitely losing money in some areas that are being floated by others.
For example: A law firm offers a fixed-price new business package that includes registration, legal documents, and a strategy session, but has found that the service is unprofitable because new business owners need a significant amount of education.
Further, they discovered that these clients weren’t “sticky” or coming back to the firm for routine business matters following the initial service. The firm knew that if they raised the price point so the service was profitable, it would be out of reach for startup business owners, so they decided to eliminate it and instead refer potential clients to a lower-cost online service.
Just as with revenue levers, here’s a little secret: Combining gross margin levers can exponentially increase revenue. For example, if you can analyze and eliminate low-performing products and services and start pushing work down (delegate), you’ve freed up staff capacity to take on higher-value work.
Which gross margin growth levers can you implement in your business this quarter?
