How to Increase Your Gross Profit Margins
Increasing your average gross profit margin is one of the easiest ways to boost your bottom line. Increasing it just a few points can add tens or even hundreds of thousands of dollars to your profit and it’s one of the easiest business improvements you can make.
Ask a sales rep what margin they typically use when quoting a client and they will provide you with a number. 30% or 32% or 35% are typical responses. You’ll likely get a very specific number in answer to the question, because for most reps, gross profit margin is determined by a habit they have developed over the years.
Reps want to avoid price objections at all costs, so they struggle to pause and think strategically before deciding on margin when providing a quote. Ask a rep why they always use 35% GPM, and they will likely tell you that is just what they have always done, and it seems to work well for them. “Works well” means they rarely must justify the price to a client – they just get the order based on the quote they provided.
These challenges will have to be addressed with your sales team before they will reward you with higher margins.
Overcoming Price Objection Fear
This is not about overcoming price objections from the client – yes, you’ll want to discuss this at your sales meetings and provide solutions to your reps. But, more importantly, reps will have to overcome their fear of dealing with this before they will feel comfortable raising their margins.
Providing solutions for dealing with price objections is a start, but you’ll want your reps to understand that having to address price issues is a good thing. If a rep has good relationships with most of their clients and they present a price that for whatever reason seems high to the client, the rep should feel comfortable that they will have an opportunity to address it. Now the rep can justify the price and secure the sale. This also gives them a chance to remind the client why they choose to deal with your company and why you offer so much more than just a price for the product.
Too many reps provide low margin quotes to avoid this situation and have no idea how much money they are leaving on the table. Discuss the benefits of occasionally dealing with a price objection in order to deliver higher margins and commissions.
The Client Sale vs. the Product Sale
If reps have a solid relationship with the client and are viewed as a preferred vendor, then asking for more margin will carry very little risk. The client has already decided to purchase from the rep and your company, so the final price of the product, within reason and within their budget, is less important than perceived by most sales reps.
Most reps have a solid client base built on trust, relationships, added value, etc. so most of the time they are only quoting product prices, so the client can give them a purchase order that reflects the value of the purchase. The client likely won’t object to a product price based on 34% or 36% or 38% margin so why not ask for more? Remind reps that with their top clients, they likely already have the order before they provide a price. They should feel good about the value they provide and ask for a margin that reflects this value.
The 2% Solution
What would happen if they asked for just 2% more margin on every quote? Most of the time, they will still get the order.
Run a 2% Program with your sales team and watch your margins grow. Market this program internally for 3-months to develop this habit. Have reps wear 2% lapel pins in the office. Provide 2% stickers for their workspace. Hang 2% dangler signs around the office. Talk about it every day for the first month. Share success stories at every weekly sales meeting. Have a daily reminder email that also shares successes.
Once reps try this for a few weeks and experience minimal push back from clients, they start to overcome their fear and will grow margins by even more than 2%. Several months later, it is not uncommon for reps to grow margins by several points on average. Over time, 34% becomes the old habit and 37% becomes the new habit. Success!
Reps need to be cognizant of order size when considering gross profit margin. Smaller orders require larger margins to make a profit that is appropriate for the time invested in delivering the product. A one-page chart that provides suggested margins for various order sizes can help reps think about margin before quoting a client. Click here to download a suggested chart and feel free to adjust it to suit your needs.