15 Practical Ways to Increase Your Margins and Build a More Profitable Business

If you're wondering how to improve profit margins in a small business, the answer isn't necessarily to find more customers or dramatically increase your turnover.

Sometimes the biggest opportunity is to make the sales you're already generating more profitable.

A business can have:

• Plenty of customers.
• Increasing sales.
• A busy team.
• A growing turnover.

and still struggle to generate enough profit.

That's because turnover and profit are very different things.

If you're selling £100,000 a month but the costs involved in generating and delivering those sales are £95,000, being busy isn't the problem.

Your margins are.

Improving profit margins can potentially create a financially stronger business without requiring you to continually chase more customers.

Here are 15 areas to investigate.

1. Understand Your Current Profit Margins

Before trying to improve your margins, establish what they currently are.

Two important figures are:

Gross Profit Margin

This measures the profit remaining after the direct costs associated with generating your sales.

A simplified calculation is:

Sales – Cost of Sales = Gross Profit

Then:

Gross Profit ÷ Sales × 100 = Gross Profit Margin

For example:

Sales = £100,000

Direct costs = £60,000

Gross profit = £40,000

Gross profit margin = 40%

Net Profit Margin

Net profit takes your wider business expenses into account.

A simplified calculation is:

Net Profit ÷ Sales × 100 = Net Profit Margin

Both numbers tell you something different about the financial performance of your business.

Start measuring them consistently.

2. Don't Concentrate on Turnover Alone

Turnover is easy to talk about.

“We're a £1 million business.”

But that tells us very little about how financially successful the business actually is.

Imagine:

Business A

Turnover: £1,000,000

Net profit: £50,000

Business B

Turnover: £600,000

Net profit: £90,000

Business B generates considerably more profit from substantially less revenue.

That's why your objective shouldn't simply be:

“How can we increase turnover?”

It should also be:

“How much profit are we generating from that turnover?”

3. Review Your Prices

Pricing is one of the first areas to investigate when margins are under pressure.

When did you last increase your prices?

Since then, have any of these increased?

• Wages.
• Materials.
• Fuel.
• Insurance.
• Software.
• Rent.
• Energy.
• Vehicles.
• Subcontractors.
• Professional fees.

If your costs have risen but your prices haven't, your margins are likely to have been squeezed.

A relatively small price increase can sometimes make a significant difference to profit.

Don't automatically assume customers won't accept it.

First calculate what your pricing actually needs to achieve.

4. Understand the Difference Between Markup and Margin

This causes confusion in many businesses.

Suppose something costs you £80.

You add a 25% markup.

£80 × 1.25 = £100 selling price

Your profit is £20.

But your profit margin isn't 25%.

It's:

£20 ÷ £100 = 20%

So:

Markup = profit measured against cost

Margin = profit measured against selling price

If you're pricing using markup while believing you're achieving the same percentage margin, you could be making less profit than expected.

5. Analyse Profitability by Product or Service

Don't simply look at the overall business margin.

Break it down.

You might discover:

Service A: 55% gross margin

Service B: 35% gross margin

Service C: 15% gross margin

That immediately gives you useful information.

Ask:

• Why is Service C so much lower?
• Could we increase its price?
• Could we reduce its delivery costs?
• Could we deliver it more efficiently?
• Should we continue offering it?

Your highest-selling service isn't necessarily your most profitable service.

6. Analyse Profitability by Customer

This is another area businesses often overlook.

Two customers might both spend £20,000 per year.

But Customer A:

• Orders regularly.
• Requires little administration.
• Pays promptly.
• Buys high-margin services.

Customer B:

• Negotiates every price.
• Requires constant attention.
• Pays late.
• Requests additional work.
• Buys low-margin services.

Their turnover is identical.

Their profitability could be completely different.

Start asking:

“Who are our most profitable customers?”

Then look for ways to attract more customers with similar characteristics.

7. Stop Giving Away Unpaid Work

This is particularly important in service businesses.

A customer asks:

“Could you just do this as well?”

It takes 15 minutes.

Then another 20 minutes.

Then an extra meeting.

Then some additional changes.

Across one customer, it might not seem significant.

Across 50 customers, you could be giving away hundreds of hours.

Clearly define:

What's included?

What's additional?

When does additional work become chargeable?

Reducing scope creep can improve margins without changing your headline price.

8. Reduce Unnecessary Discounting

Discounting can have a much greater effect on profit than many business owners realise.

Imagine:

Selling price = £1,000

Cost to deliver = £700

Gross profit = £300

Now give a 10% discount.

Selling price = £900

Cost = £700

Gross profit = £200

You've discounted your price by 10%.

But you've reduced your gross profit by 33.3%.

That's a significant difference.

Before giving a discount, calculate what it does to the profit on the sale.

9. If You Reduce the Price, Change the Deal

Sometimes there's a valid commercial reason to reduce a price.

But rather than simply giving money away, exchange value for value.

For example:

A customer receives a lower price in return for:

• Higher volume.
• Longer commitment.
• Annual payment.
• Faster payment.
• Reduced scope.
• Less support.
• Standardised delivery.

This turns discounting into a commercial negotiation rather than an automatic reduction in margin.

10. Negotiate Better Supplier Prices

Your selling price is only one side of your gross margin.

The other is your cost.

Review your major suppliers.

Ask:

• Could we negotiate better prices?
• Could we consolidate purchasing?
• Are volume discounts available?
• Are alternative suppliers available?
• Are we paying for unnecessary extras?
• Could we negotiate better payment terms?

Don't automatically change supplier purely to save money.

Quality, reliability and service matter too.

A cheaper supplier that causes delays, complaints or rework could actually reduce your overall profitability.

11. Improve Productivity

Labour is a major cost for many small businesses.

That means productivity can have a significant effect on margins.

Suppose a job is priced to take 10 hours.

If it regularly takes 14 hours, your margin will be lower than expected.

Investigate why.

Could you improve:

• Scheduling?
• Training?
• Equipment?
• Technology?
• Automation?
• Communication?
• Planning?
• Processes?
• Delegation?

Improving productivity isn't about making people work harder.

It's about making it easier to produce more value from the resources already available.

12. Reduce Rework, Errors and Waste

Mistakes cost money.

A job may need doing again.

Materials are wasted.

Employees spend additional time correcting problems.

Customers need additional support.

Look at:

• Customer complaints.
• Returns.
• Rework.
• Wasted materials.
• Missed appointments.
• Incorrect orders.
• Poor-quality leads.
• Administrative mistakes.

Then ask:

“Why does this keep happening?”

Fixing the underlying process can improve both customer satisfaction and profit margin.

13. Increase Your Average Customer Value

Another way to improve overall profitability is to increase the amount customers spend.

Consider:

Upselling

Could the customer purchase a higher-value version?

Cross-Selling

What complementary services could they buy?

Bundling

Could you package several services together?

Recurring Revenue

Could you introduce:

• Retainers?
• Maintenance plans?
• Memberships?
• Subscriptions?
• Service agreements?

If the additional revenue can be delivered efficiently, increasing customer value can improve overall profitability.

14. Sell More of Your High-Margin Services

Once you know which services generate the best margins, ask:

“Why aren't we selling more of these?”

Perhaps your marketing currently promotes low-margin services because they've always been popular.

Instead, deliberately promote services that combine:

Strong customer demand + Good customer value + Healthy margin

This can change the financial performance of the business without requiring a dramatic increase in overall sales volume.

15. Stop or Redesign Unprofitable Services

Business owners can become emotionally attached to products or services.

“We've always offered it.”

That's not necessarily a good reason to continue.

If a service consistently produces inadequate margins, consider:

• Increasing the price.
• Reducing delivery costs.
• Standardising it.
• Changing what's included.
• Automating parts of delivery.
• Packaging it differently.
• Outsourcing elements.
• Removing it.

Not every sale is worth having.

Sometimes improving profit means deliberately stopping low-value activity.

How Can a Small Business Improve Gross Profit Margin?

Gross profit margin is mainly influenced by the relationship between:

Selling Price

and

Cost of Delivery

So there are three broad approaches.

Increase Selling Prices

Generate more revenue from each sale.

Reduce Direct Costs

Lower the cost of providing the product or service.

Change Your Sales Mix

Sell a greater proportion of higher-margin products and services.

Often, the strongest strategy involves a combination of all three.

How Can I Improve Profit Without Increasing Prices?

Increasing prices isn't your only option.

You could:

• Negotiate supplier costs.
• Improve productivity.
• Reduce rework.
• Eliminate unnecessary discounts.
• Control scope creep.
• Sell higher-margin services.
• Increase customer value.
• Improve sales conversion.
• Reduce unnecessary overheads.
• Retain customers longer.

The key is understanding where your margin is currently being lost.

Beware of Cutting Costs Too Far

Cost reduction can improve margins.

But indiscriminate cost cutting can damage the business.

Imagine saving £20,000 by reducing:

• Marketing.
• Training.
• Customer service.
• Quality control.

If those cuts result in losing £100,000 of profitable sales, you've made the business worse.

Ask:

“Does this expense create or protect value?”

Cut waste.

Don't automatically cut investment.

Increasing Sales Doesn't Automatically Improve Your Margin

Imagine your existing business generates:

£500,000 sales

at a:

40% gross margin

Now you win another £100,000 of work.

Great.

But suppose the new work only generates a 15% margin.

Your turnover has increased substantially.

Your overall margin may actually fall.

This is why rapid growth needs to be monitored carefully.

Don't just ask:

“How much new business have we won?”

Ask:

“What margin will that business generate?”

Know Your Minimum Acceptable Margin

Consider setting a minimum commercial margin for different types of work.

That doesn't mean every sale needs the same margin.

But your team should understand when a quotation falls below an acceptable level.

For example:

Target margin: 40%

Review required below: 35%

This helps prevent employees or salespeople from winning business by giving away too much margin.

The precise figures will depend entirely on your business.

Watch Your Sales Mix

Your overall business margin can change even when individual prices remain exactly the same.

Suppose:

Service A margin = 60%

Service B margin = 20%

If sales gradually shift from Service A towards Service B, your overall gross margin falls.

Nothing has become more expensive.

No prices have changed.

Your sales mix has changed.

That's why profitability should be analysed by:

• Product.
• Service.
• Customer.
• Salesperson.
• Location.
• Project type.

depending on your business.

Measure Margin in Pounds as Well as Percentages

Percentages are useful, but don't forget actual money.

Consider:

Job A

Sales: £1,000

Margin: 50%

Gross profit: £500

Job B

Sales: £10,000

Margin: 25%

Gross profit: £2,500

Job A has the better percentage margin.

Job B generates more actual gross profit.

Both measures matter.

The objective isn't necessarily to maximise percentage margin at all costs.

It's to understand the combination of:

Margin % + Profit £ + Capacity + Risk + Customer Value

Improve Sales Conversion Without Giving Away Margin

Sometimes sales teams improve conversion by simply reducing prices.

That's not necessarily improved selling.

Measure:

Conversion rate

alongside:

Average selling price

and:

Gross margin

If conversion rises but margins collapse, you may simply be buying sales through discounting.

Instead, improve sales conversations around:

• Customer problems.
• Desired outcomes.
• Value.
• Expertise.
• Differentiation.
• Results.
• Service.

A stronger value proposition can help you protect margin.

Profit Margin and Cash Flow Are Connected

Higher margins can improve cash generation.

But profit and cash flow aren't the same thing.

You could have excellent margins and still experience cash-flow problems if customers take too long to pay.

Similarly, you could increase sales and profit but require significant cash upfront to deliver the additional work.

So review:

Margin

alongside:

Payment terms + Invoicing + Credit control + Working capital

A financially strong business needs both profit and cash.

A Simple Profit Margin Improvement Exercise

Choose your five biggest-selling products or services.

Create a simple table with:

Selling Price

Direct Cost

Gross Profit £

Gross Margin %

Delivery Time

Annual Sales

Annual Gross Profit

Then ask:

1. Pricing

Which could support a price increase?

2. Costs

Where could costs be reduced without damaging quality?

3. Productivity

Which services take longer than expected?

4. Sales Mix

Which high-margin services could we sell more of?

5. Low Performers

Which services need redesigning or removing?

This can reveal opportunities that aren't obvious from your overall accounts.

The 1% Margin Question

Small improvements can become significant as turnover grows.

Imagine a business with £1 million turnover.

Improving its margin by just one percentage point potentially represents:

£10,000

of additional gross profit, assuming the same sales base and relevant costs.

A five-percentage-point improvement represents:

£50,000.

That's why margin deserves management attention.

You don't necessarily need one dramatic change.

Several smaller improvements can combine to produce a substantial result.

Create a Monthly Margin Review

Don't wait until year-end accounts to discover your margins have deteriorated.

Create a regular review.

Monitor:

Sales

↓

Cost of Sales

↓

Gross Profit

↓

Gross Margin %

↓

Operating Expenses

↓

Net Profit

Then investigate significant changes.

If gross margin falls from 40% to 35%, ask:

Why?

Was it:

• Pricing?
• Supplier costs?
• Wages?
• Discounting?
• Sales mix?
• Productivity?
• Waste?
• Scope creep?

Find the cause while you can still do something about it.

Better Margins Can Create a Better Business

Improving margins doesn't simply mean putting more money in the owner's pocket.

Healthy margins give a business the ability to invest.

That could mean:

• Better employees.
• Better equipment.
• Marketing.
• Training.
• Technology.
• Improved customer service.
• Cash reserves.
• Business growth.

And potentially:

Less pressure on the owner.

If your margins improve, you may not need to continually chase ever-increasing sales simply to generate enough profit.

Want to Improve Your Business Profit Margins?

I'm Kim Wheatley, a business coach and mentor helping SME business owners across Essex and the UK.

I work with established business owners who are generating reasonable turnover but believe the business should be producing more profit.

We can look at areas including:

• Pricing.
• Profit margins.
• Customer profitability.
• Service profitability.
• Sales conversion.
• Customer value.
• Costs.
• Productivity.
• Cash flow.
• Business growth.
• Accountability.

The objective isn't simply to cut costs or increase prices.

It's to identify where profit is being lost and what practical changes could improve the financial performance of the business.

Book Your Free Business Growth Accelerator Meeting

If your business is busy and generating sales but the profit doesn't seem to reflect the amount of work you're doing, let's look at what's happening.

During a Free Business Growth Accelerator Meeting, we can discuss:

• Your current margins.
• Pricing.
• Costs.
• Sales.
• Customer profitability.
• Service profitability.
• Productivity.
• Opportunities to improve financial performance.

The objective is to identify practical areas where relatively small changes could potentially make a significant difference.

Book your Free Business Growth Accelerator Meeting today.

Frequently Asked Questions

How can a small business improve its profit margins?

Start by understanding your current margins by product, service and customer. Then investigate pricing, direct costs, productivity, discounting, scope creep and sales mix. Often several relatively small improvements can combine to create a significant overall improvement.

What's the difference between profit and profit margin?

Profit is the amount of money remaining after relevant costs have been deducted. Profit margin expresses profit as a percentage of sales, allowing you to see how much profit is being generated from each pound of revenue.

How do I calculate gross profit margin?

A simplified calculation is: Sales minus Cost of Sales = Gross Profit. Then divide Gross Profit by Sales and multiply by 100. For example, £40,000 gross profit from £100,000 sales represents a 40% gross margin.

What's a good profit margin for a small business?

There isn't one margin that's appropriate for every small business. Margins vary considerably by industry, business model, cost structure and risk. Compare your margins over time, against your business targets and, where reliable data is available, relevant industry benchmarks.

Can increasing prices improve profit margins?

Yes. If your delivery costs remain broadly unchanged, a price increase can improve gross profit margin. However, you should also consider customer response, sales conversion, market positioning and the value you provide.

Can reducing costs improve profit margins?

Reducing direct costs can improve gross margin, while reducing unnecessary overheads can improve net profit. However, avoid cuts that damage quality, customer service or your ability to generate profitable sales.

Why is my turnover increasing but my profit margin falling?

Possible causes include rising supplier costs, wage increases, discounting, selling more low-margin products, poor productivity, scope creep or prices failing to keep pace with costs. Analyse the components of your margin to identify the cause.

Should I stop selling low-margin services?

Not automatically. A low-margin service may have strategic value, generate substantial profit in pounds, create repeat business or lead to higher-margin sales. Assess the complete commercial contribution before deciding whether to increase the price, redesign it or stop offering it.

Can a business coach help improve profit margins?

Business coaching can help you examine the commercial factors affecting margins, including pricing, sales mix, customer profitability, productivity and costs. Specialist accounting, tax or financial advice should be obtained from an appropriately qualified professional.