Profit maximisation is the process of increasing the profit margin of a business. This may be accomplished either by lowering costs and expenses, increasing revenue, or both. Profit maximisation is a key contributor to the long-term health of a business, as it provides the cash flow to maintain financial stability, reinvest into the business for growth, attract and reward investors, and adapt to evolving market conditions.
Profit Maximisation: Definition, Examples, and Tips
As a financial measure, profit is the money made by an organisation that’s left over from revenue after costs and expenses are taken out. Profit maximisation is the work involved in expanding the margin of profit a business can make as part of its ongoing operation.
Profit maximisation is important to businesses of all sizes, especially as costs rise. It’s especially important for small to medium-sized enterprises (SMEs), which make up 97.2% of businesses in Australia.
Without the financial reserves and scale of larger companies, SMEs are hit harder by rising costs and market disruptions. For many SMEs, maximising profits is absolutely essential to long-term success.
Examples of Profit Maximisation
- A clothing business looks at sales data to identify pants that generate a low profit margin—and discontinues them to focus on higher-margin shirts.
- An electronics manufacturer negotiates better prices with battery suppliers and works with logistics partners to create a more cost-effective supply chain.
No matter your industry, the playbook for how to maximise profit in business revolves around a few universal principles: control spend with foresight; double down on high-margin products; and scale smarter with data and automation.
These principles can be seen in the following 8 profit maximization tips:
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Take a long-term view on operating expenses (OpEx).
Operating expenses, such as the money you spend on salaries, utilities, and marketing, play a central role in business operations. Businesses under pressure to be profitable often instinctively make cuts to OpEx to improve the bottom line, as these expenses aren’t directly linked to production. However, slashing OpEx without considering the long-term effects can erode profits. For example, spending less on customer acquisition activities such as advertising can hurt your sales pipeline lower profits further down the track.
A more sustainable way to reduce OpEx is by improving operational efficiencies. For instance, Australian surfboard and standup paddleboard company Global Surf Industries used the NetSuite OneWorld application to eliminate countless hours of double data entry and reduce annual accounts and tax reporting time by 50%.
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Ensure that you manage cost of goods sold (COGS) accurately.
Cost of goods sold (COGS) refers to the direct costs arising from selling a product or service. Understanding COGS is crucial to pricing goods to maximise profit. Getting a better measure of your COGS requires your organisation to accurately define, monitor, and cost out the labour and materials required to develop products.
As with OPEX, managing COGS to boost profitability is about taking a long-term view. Companies may attempt to reduce their COGS now by using cheaper materials during production but end up compromising product quality and driving customers away in the long run.
One way to reduce COGS for manufactured products is to find ways to make the production process more efficient. Australian electronics company Extel Technologies, for example, increased its manufacturing efficiency by an estimated 20% by using NetSuite ERP to review production performance daily, creating workgroups to identify root causes of recurring problems.
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Negotiate with suppliers to reduce costs.
A company’s terms with suppliers, such as the cost of purchased goods to sell or materials to use for products, are a significant contributor to COGS. For this reason, it’s crucial to negotiate terms with suppliers—and revisit those terms regularly—to keep costs down and ultimately boost profitability. For example, if a shoe manufacturer orders 100,000 pairs of shoelaces from five suppliers monthly, at 20,000 pairs each, it could boost profits by negotiating a volume discount with a single, favourable supplier and shifting more purchases to that company.
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Re-optimise your product portfolio using data.
Having too many product items to manage can pull down your operational efficiency and bottom line. Before launching new products, analyse your organisation’s financial data to identify the highest- and lowest-margin products. Consider re-optimising your existing portfolio by focusing on fewer, higher-margin products, even discontinuing entire low-margin lines.
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Master the art of repackaging your offerings.
Upselling, cross-selling, and reselling helps businesses maximise the value of the customers they already reach. Some best practices include:
- Personalise cross-sells. Cross-selling is when a business offers customers products or services that are associated with their initial purchase. Have a customer looking to buy coffee beans? Consider bundling a discounted coffee grinder and coffee strainer.
- Reducing returns. A high volume of product returns can eat into profitability. However, you can reduce the instances of returns by ensuring product descriptions online are accurate and detailed, and customers in-store are being sold the best items for their respective needs. This way, customers are less likely to purchase products they will want to return further down the track.
- Drive recurring revenue with subscriptions and add-ons. In Australia, many businesses are turning to subscription models (opens in new tab) and value-added services to drive up recurring revenue. Pet care, beauty, food and beverage, and other companies are selling varying types of monthly or annual subscriptions to their products, while other businesses, such as car dealerships, offer third-party luxury modifications as paid add-ons.
- Identify new ways to move stale inventory. Unsold inventory takes up valuable space in the warehouse. Consider offloading it through outlet channels or third-party platforms such as Amazon.com.au, or by donating it to charities. Donations may provide a tax deduction under the Australian Taxation Office guidelines (opens in newtab).
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Extend customer lifetime value with advocates.
A happy customer is your best advocate. Create a simple referral programme to incentivise those advocates to spread positive reviews in order to multiply your reach and publicize your brand.
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Empower your employees to improve efficiency.
Front-line workers often spot inefficiencies first. Empowering them to make improvements can help drive profitability. For example, shipping the wrong items to customers requires businesses to spend money on sending replacements and recovering those items. Warehouse employees may be able to identify a logistics flow that’s impacting picking accuracy.
Even a single suggestion from the ground floor, such as making labels clearer, can go a long way in improving cost efficiency in the supply chain. Companies can go a step further by empowering workers with technologies, such as digital pick lists, to enhance efficiency.
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Track key performance indicators, benchmark, and forecast regularly.
Identify key performance indicators tied to profit margin by product, cost per customer acquisition, and average order value—and review and benchmark these KPIs regularly to spot trends crucial to driving profitability. Forecasting tools that track KPIs over time help you spot trends early and make faster, more profitable decisions, such as ensuring that inventory stays at the optimal ranges to maximise product availability while reducing warehouse overhead.
Maximise Profitability in Your Business With NetSuite ERP
NetSuite ERP connects your company’s financial, inventory, operations, and other data in one platform, information you can use to:
- Improve pricing and resource planning.
- Understand what’s driving your profit margins.
- Automate processes to free up time for higher-level decision-making.
With all that data in one place, growing companies can scale more efficiently and stay agile in an ever-changing market.
Profit Maximisation FAQs
What does maximise profitability mean?
Maximising profitability is about increasing your company’s profit margins by finding ways to increase revenue, reduce costs, or both. It’s about taking a long-term view of the business and understanding which decisions to make now to drive profitability long term.
How do you maximise profitability?
There are a number of ways. Reassess your current inventory, product lineup, and operations to better understand what’s driving or pulling down profitability.Understand the strategic adjustments you need to make to maximise profitability now—such as cutting operating expenses or reworking the mix of products—and their long-term impact on the bottom line. Using an ERP system, automate processes to increase efficiency and collect KPI data to drive profitability.
How do I increase profitability?
Focus your efforts where the returns are strongest. For example, some customers place frequent orders but require plenty of follow-up service. Others order less often but at a higher margin and with fewer demands.
How do you maximise profit potential?
Maximising profit potential requires in-depth analyses of financial, operations, and other data to make informed decisions, such as refining pricing based on sales forecasts, adding recurring revenue streams based on new customer behaviour, or investing in technologies that give you a holistic view of your business’s health.
