What is the ideal profit margin? One might answer as much as possible, and many would consider this the correct answer, but business doesn't always work like that. The business world is more complex and profit margins can be greatly down to the sector and country you're in.
As a company, you may have already started out well...
Your initial pricing strategy has been successful until now. However, over time, costs have increased and as a result you want to increase your prices, get a better margin. This is possible but whenever you raise prices, you need to add something to the offer; the customer wants to know that if they are paying a higher price, they are getting a better/improved product.
When looking at pricing strategies, information is key. That means having clear information on all costs, the market, your competition and on the value proposition you offer to your customer. Pricing is serious business because on average, for every 1% you increase your prices; you get an 8-11% increase in profits as a result.
There are other ways to drive your margins too. According to Marketscape Inc., B2B e-Commerce increases margin by 10%. As you well know, everyone “is going digital” so managing all your business needs in the most efficient way makes sense.
Information is extremely valuable to companies
Having every transaction, quantity and communication exchange to hand and at speed, makes you as a company more efficient and effective. Maximising social media marketing will reap rewards too.
Netflix made a mistake in 2011 when they announced a new pricing strategy for its business model. They offered a DVD by mail and streaming service which resulted in a price increase of 60% for many Netflix subscribers. Consequently in the following months, Netflix lost almost 1 million customers and they received nearly 13,000 comments on their blog, from (as you can imagine) many disgruntled customers. Netflix wanted more profit, they increased their prices but didn't get what they wanted.
With established companies, start-ups or when entering a new market, you don't want to get the margin wrong, too little and you won't be making enough profit and too much, could mean that your customers believe you have pitched the price too high and won't buy from you. That's why it's important to research your market and often, finding a partner who knows about the market can be a good way to do that.They know the country dynamics, the costs involved. They are able to find out about your customers and what they are willing to pay. They can advise you on all levels and make your entry into a country or market that much easier.
The good news about Netflix is that they learnt from their mistake and are back on track. I might have given a B2C example there, but the same principle works in B2B, understand your market and customer in B2B or B2C.
In conclusion, when we talk about the factors to drive your margins, we want you realize It's about managing your costs, managing economies of scale and promoting yourself in the right way. Most importantly, from the very beginning through to the long term, a business must continue to understand the customer and adapt so that the profit continues to come in and that you become the biggest and best player within your sector, whether that be in retail, technology, service, finance or any.
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