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Maximizing Gross Profit Margins: 7 Strategies for Success

Ethan Keller March 28, 2024

A Guide to Self-Auditing your Amazon Account – Optimizing for Performance and Profitability

Whether you’re already running a business or want to acquire a new one, maximizing your average profit margins is key to thriving as an entrepreneur.

Swimming in endless operating costs, labor costs, and overhead costs can drag your bottom line. And if you run an ecommerce store, you’ll need to keep an extra eye out for additional operational costs that can eat into your revenue.

But costs aren’t the only thing to factor in when looking to widen your gross profit margin.

Let’s take a closer look at gross and net profit margins and how they affect your business.

You’ll also discover how to calculate your gross profit margin — along with seven key strategies to maximize it.

The Basics: Gross and Net Profit Margins

Here’s what you need to know about gross and net profit margins.

Your gross profit margin is your revenue percentage after your cost of goods sold (COGS). It reveals how efficiently your company produces goods or services.

You can calculate it by subtracting the COGS from your revenue and then dividing it by your revenue.

Here’s how the formula looks:

(Image Source)

Net profit margin, on the other hand, indicates your revenue percentage after you’ve deducted all expenses. It gives you a comprehensive view of your overall profitability.

To get the net profit margin percentage, subtract all of your expenses (including your COGS, operating expenses, interest, and taxes) from your total revenue. Then divide by revenue and multiply by 100.

Here’s how the formula looks:

(Image Source)

TL;DR: Gross profit margin calculations only factor in production costs, while net profit margin considers all expenses, providing a deeper financial picture. By calculating and comparing these margins, you can gain deeper insights into how efficient and profitable your business is.

Calculating Gross Profit Margin

Let’s break down how to calculate your gross profit margin using a simulated example.

For the following calculations, imagine you run an ecommerce business with an average monthly total revenue of $50,000.

Step 1: Calculate the COGS

Start by determining your COGS.

Imagine your ecommerce business spends about $12,000 on materials and $8,000 on production and labor costs every month.

In other words, $12,000 + $8,000 = $20,000

This means your total COGS is $20,000.

Step 2: Calculate Your Gross Profit

Next, determine your gross profit.

Subtract your $20,000 COGS from your $50,000 monthly revenue.

So, $50,000 – $20,000 = $30,000

This means your gross profit is $30,000.

Step 3: Calculate Gross Profit Margin

Finally, divide your gross profit by your total monthly revenue. Then multiply by 100.

Or, ($30,000 / $50,000) x 100 = 60%

In this case, your gross profit margin is 60%.

This means that for every dollar you earn in revenue, you keep $0.60 as a profit after accounting for the cost of goods sold.

Understanding and monitoring this metric can help you better optimize how efficient and profitable your business is.

What Does Gross Profit Margin Indicate?

Your gross profit margin indicates how much your business can grow.

For instance, having a high gross profit margin means you’ll likely have enough money to cover your operating expenses and invest in your business growth. That might mean innovating your products, adding new offerings, or expanding your ad budget.

With a healthy gross profit margin, you’ll also have more flexibility to set strategic prices to attract customers and maximize revenue.

And speaking of boosting revenue …

Here are seven strategies you can use to widen your gross profit margin:

7 Strategies to Increase Your Gross Profit Margin

Boosting gross profit margins is a must at any business stage — whether you’re a startup looking to build a name for yourself or a seasoned ecommerce store selling niche products like picture frame materials.

To make the most out of the following strategies, start by running a profit and expense audit to see where you stand monthly, quarterly, and annually. Be sure to highlight any problem areas (such as specific high costs or stale inventory) that are hindering you from making better profit margins.

(Image Source)

Then, tailor the following strategies to your business’s unique needs to encourage a wider gross profit margin:

1. Increase Profit Margin through Cost Control

Use cost control tactics, such as reducing operating costs and overall business expenses.

For instance, you could bring costs down quite a bit by optimizing your tech stack and finding more affordable suppliers.

For example, if your business is spending too much on video communication tools like Twilio, you might decide to migrate from Twilio video to a more cost-effective or feature-rich alternative. You might also find more affordable and higher-quality suppliers by switching from international to local vendors — or by manufacturing more products in-house.

These strategies can help free up capital and directly enhance your bottom line without impacting the quality of your products or services.

2. Increase Profits with Value Addition

Add value to your products or services by enhancing quality, adding features, and providing top-notch customer service.

This can also help you create a competitive edge that justifies raising prices. Customers are willing to pay more when they see the value you offer.

You can also integrate upsell calls to action (CTAs) during checkout to help boost your average order value. Try testing CTAs like “You might also like (link to product)” or “Customers who bought this also bought (links to products).”

Implementing a customer loyalty program can also help you foster repeat business and a higher lifetime value (LTV) per customer.

3. Maximize Profit through Diversification

Spread risk and open new revenue streams for your company with diversification tactics.

Consider exploring new markets, expanding your product line, and tapping into additional customer bases.

For instance, if you run a telehealth brand that specializes in DHT hair loss and skin care support for women, you might expand your products to target male shoppers as well. Or, if you run a green tech brand that sells to prospects in America, Canada, and Mexico, you might expand your sales reach to Europe and Asia, too.

You might also decide to create tiers in your business — or sister companies — to cater to multiple markets.

For example, if you run a SaaS company, you might create a tier for small teams, another for startups, a third for mid-size companies, and a fourth for enterprises.

(Image Source)

Or, if you run an online clothing boutique for kids, you might open a sister company that specializes in baby wear and a third company that focuses on clothes for teens and young adults.

4. Streamline Operations for Enhanced Efficiency

Optimize your core operations and workflows to boost efficiency and cut costs.

For instance, you might automate redundant processes, outsource non-core functions, and embrace lean manufacturing techniques.

Streamlining your operations not only increases productivity and reduces waste but also speeds up turnaround times — which can encourage a healthier profit margin.

5. Invest in Your Team

Create a skilled and efficient workforce by scheduling ongoing team training and development sessions.

The more you value your employees, the more you inspire them to show up as their best selves.

Team members who give it their all can contribute to your bottom line by boosting sales, becoming more productive workers, and spreading the word about your business.

Here are some other benefits of having a highly skilled and valued workforce:

Employee Retention and Engagement

Showing appreciation and investing in employee development can encourage company loyalty and engagement.

Engaged employees tend to be more committed and productive and contribute positively to the work environment.

Increased Innovation and Problem-Solving

A skilled workforce feels valued and empowered to think creatively and solve problems.

When employees are given opportunities for growth and feel appreciated, they’re more likely to come up with innovative ideas that can drive the company forward.

Enhanced Company Reputation

A workforce that feels respected and valued fosters a positive company culture. This culture can attract top talent, boost employee morale, and enhance your company’s reputation — internally and externally.

A positive reputation encourages increased customer loyalty, better business partnerships, and overall success in the market.

6. Price Optimization: The Role of AI and Machine Learning

Leverage AI and machine learning to optimize your pricing and boost customer satisfaction.

AI and machine learning tools can help you reshape your pricing strategies by offering dynamic pricing models that adapt swiftly to changing market conditions.

This helps you comprehend market dynamics in real-time and adjust prices strategically to maximize your profit.

(Image Source)

With these capabilities, you can:

  • Tailor your prices to demand fluctuations in real-time
  • Make sure your prices are always competitive
  • Capitalize on emerging trends
  • Stay agile and responsive

Dynamic pricing machine learning algorithms also help you forecast demand accurately and — set prices that align with customer expectations.

By understanding customer behavior and preferences, you can optimize your pricing strategy to not only boost profit margins but also enhance customer satisfaction, creating a win-win scenario for your business.

7. Protect your assets

Use asset protection strategies to protect your business’ worth and revenue.

While this may involve upfront costs or reduce your access to certain business assets, it can also contribute to long-term financial stability and sustainability.

For instance, prioritizing LLC asset protection can prevent or minimize financial losses from lawsuits, theft, or other unforeseen circumstances that could threaten your profit margins. Keeping some of your assets protected in an offshore account, for example, can help protect some of your business revenue in the case of a cyberattack or another emergency.

Work with a business consultant to determine the best asset protection action plan for your specific business.

Wrap up

Getting an accurate picture of where your business stands is key to understanding and increasing your gross profit margin.

Before implementing the strategies we shared today, audit your business expenses and pinpoint any direct or indirect costs negatively affecting your revenue.

Then, introduce cost-cutting measures and find more ways to build in value. (See specific examples in strategies one and two above.)

Some other strategies we shared in this article include:

  • Use diversification tactics
  • Streamline your operations
  • Invest in your team
  • Optimize your prices with AI tools
  • Protect your assets

You can also work with a consultant for more customized support and advice for your specific business.

And if you’re looking to buy or sell a business, join thousands of customers who’ve bought and sold over $450+ million worth of online businesses with Empire Flippers. Get started for free now.

Here’s to your success!

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