4 key factors that can impact business profitability

From incorrect pricing to ignoring overhead costs: what is stifling the profitability of your business?

Running a business can be a challenging endeavour, especially when it comes down to making profits. And the fact of the matter is that even if you have the best of the products and services to offer and reasonably good sales as well, but if your business is not generating consistent profit, it will eventually face closure.

Rather, the businesses earning large profits are often termed as the most efficient and successful in the market. Besides, a reasonably good profit earning business is able to secure a better image in the market and can easily attract more customers while also enticing much desired investment or funding from investors, and all these are incremental in further re-fuelling the business growth. So, it would not be wrong to say that achieving a sufficiently high level of profit is (and should be) the primary goal of every business as it effects its growth and long-term survival in the market. Though profit margin varies from industry to industry, but as a general rule of thumb, “a 5% is a low margin, 10% is a healthy margin, and 20% is a high margin”.

“Business is all about solving people’s problems – at a profit” – Paul Mardsen

However, unfortunately, it is seen that many at times businesses end up discontinuing its operations within the first few years itself this could be pertaining to a start-up or even for an established business which penetrated into a new market. And, this is largely attributed to inability in generating a sufficient profit margin. As quoted by Sigmon, the author of the book, ‘Six Steps to Creating Profit’, “nearly two-thirds of small and mid-sized businesses either don’t make a profit or fail to increase their profits from the year before”.

So, exactly what stifles businesses from being profitable? To answer this, we have listed out the four major factors that typically influence the ability of a business to being profitable.

#1 Incorrect pricing of product or service

It is seen that at time entrepreneurs are not able understand the basic of properly pricing of the product that eventually results in non-generation of profits. Supposedly, if you set the product prices too low, though more customers will reach out to you to buy your products; however, the price set by you might be so low that you are hardly able to make a profit. Conversely, if you set your prices too high, then of course fewer customers will buy your products owing to non-affordability factor and again it will not generate you much of profits. The bottom-line lies in considering your margins carefully and then appropriately pricing your product. You can also consider performing a proper market/pricing analysis, so that you are able to have a complete understanding when pricing your products.

Key Takeaway: Consider your margins while pricing your product. Do not hesitate from charging for quality!

#2 Aggressive competition

Another problem that is critical in lowering your profits is the degree of competition in the market. Sometimes, it happens that even though the pricing is right but owing to too much of existing competition, the profits get narrowed down. But you can overcome this by branding yourself in a better way than your competitors or come up with a differentiation strategy that could set you apart from other competitors. Also, you should definitely consider taking up competitor benchmarking analysis to identify your competitors and monitor their strategies on regular basis.

Key Takeaway: Gain a competitive edge by adopting a unique differentiation strategy!

#3 Ignoring overhead or hidden costs

It is also a possibility that you are overlooking the relative costs involved in business such as rent, raw material, and labour increase as these all predictably lower down the profit. Say for example, you might by spending too much of amount on a huge office space which might be not a need of the hour or might be some of the staff that you have hired is not required. This simply means, you need to cut down on any of the overhead costs as this will indeed burn a hole in your (profit) pocket. Besides, it is also required that you take into consideration of all the hidden costs that may arise in future such as increase in labour costs, insurance costs, tax costs etc. and even periodic variables like utility costs etc. so that at the end you do not have to cut down your profits to take care of these.

Key Takeaway: Do not overlook any kind of overhead or hidden costs!

#4 Marketing Strategy

In today’s cut-throat competitive era, it has become essential for every entrepreneur to market its product by adopting various new marketing strategies on regular basis in order to attract more customers, and in turn increasing the profitability of business. However, this also means directly putting burden on the profits of the company. So, you need to ensure that whatever marketing strategy you are adopting is not only based on your target market and customers but also should be in sync with increasing the revenue sales and profits, and does not depreciate it.

Key Takeaway: Make certain that your increased promotion and advertising strategy is in sync with your increased profits!

Act now and discover the core issues affecting profitability of your business!

The bottom line is that profit is inevitably the lifeline of any business be it large, mid-sized or small. Every business dream to earn more and more profit by increasing its sales and minimizing its cost; however, at times certain problems can turn this dream into nightmare. So, the faster you can discover your core issues, the faster you can reduce or stop your profit outflow!

Feel free to share any other core issue that you feel obstructs business profitability?

Tags: Business, cost, growth, Market, profit