Eighty-two percent of small businesses that fail do so because of improper cash flow, as reported by Entrepreneur. As a business owner, you should constantly be looking for ways to improve your cash flow and maximize profit. Only half of businesses make it past the five-year mark, so maximizing profit should be a concern no matter if you’re a new or more established firm.
If you’re wondering what you can do to maximize profit, you’re in luck. In this article, we provide a complete guide on how to maximize profit. We offer four tips that you can implement into your business model to ensure profit maximization.
One of the first things you can do to increase profits is to understand profit maximization and ensure that you are pricing your products and services correctly relative to the market price.
To ensure profit maximization, you need to make sure that your marginal cost is equal to marginal revenue. The marginal cost is the increase in cost by producing one extra unit. Marginal revenue equals the change in your total revenue as the result of increasing sales by one extra unit.
As seen in the graphic below, the marginal revenue curve should remain flat. The marginal revenue curve shows any extra earnings from increasing your level of output. Because it costs the same to make each unit, you don’t gain anything by increasing production.
The marginal cost curve, on the other hand, assumes that creating more units will cost more money. The intersection point of these two is labeled as “Q.” This is the price and quantity that you should be using to achieve maximum profit.
Source: Oregon State University
Profit maximization optimization can be tricky. Many of these analyses assume things like perfect competition and market demand. But understanding the basic principles behind profit maximization can help you better hone in on the proper price for your goods and services.
No matter if you run an e-commerce or brick-and-mortar store, you can improve profits by focusing on converting one-time clients into recurring clients. Economists have found that satisfied recurring buyers are the most valuable customers a business can have. Recurring customers:
Additionally, because you already have a relationship with recurring customers, you don’t need to spend as much on variable costs, like marketing and sales. This means that your total cost relative to units of output decreases. Focusing on keeping your existing customers can improve your total profit while reducing your total costs.
One way to keep customers happy and engaged is by making the buying experience as painless as possible. To do so, make sure you can accept as many payment methods as possible. Nadapayments, for instance, allows customers to pay not only with cash or debit cards but also:
The fewer hiccups customers have during the buying process, the more they are encouraged to buy.
Sales may be useful in helping you push additional units out the door, but they won’t do much to improve your total revenue. Offering sales cuts into your profits and sets a lower price expectation on your products.
If customers see a higher price for a product, knowing that there is a sale coming down the road discourages them from buying at that particular moment.
Instead of offering sales, have free shipping deals for online purchases. Free shipping can improve profitability because it encourages more frequent orders. Similarly, brick-and-mortar stores can offer value by bundling items together at a package price rather than discounting individual products.
Sales may improve your levels of output in the short run, but offering free shipping or bundled pricing will improve your quantity of output in the long run, allowing you to achieve maximum profits.
We mentioned previously that you should accept as many forms of payment as possible to improve your likelihood of converting a sale. However, one of the things you need to be mindful of when accepting credit card payments is processing fees.
Processing fees are the fees required by merchant accounts and payment processors to complete the transaction. Typically, they are around 3.5% of the transaction.
Let’s say that you run a restaurant. The average cost of a pizza is $20. A customer comes in and purchases two, for a total of $40. The customer chooses to pay with a credit card. As a result, you now owe $1.40 in processing fees. Now, instead of $40, you earn $38.60 on the transaction. The bottom line is that processing fees cut into your profit.
Fortunately, there is a solution. You can implement a surcharge program instead of absorbing the cost of processing fees. With a surcharge program, you pass along the cost of processing fees to your customers. You also incentivize them to pay with cash or a debit card. Consumers only have to pay processing fees if they elect to pay with a credit card.
In the above example, if you had a surcharge program in place at your restaurant, the total cost of the transaction would be $41.40. The extra $1.40 would go toward the processing fees, and you’d be able to keep the full $40.
Processing fees can add up, costing you thousands of dollars per year. If you are in a competitive market, these fees can make a difference in whether your business makes it or not. When you use Nadapayments, you receive everything you need to institute a surcharge program, including required signage.
As a business owner, you should constantly be worried about growth. Even if you have been successful in your first few years of ownership, it takes long-term growth to succeed. Remember, half of all businesses fail within their first five years.
Learning how to maximize profit will help improve your bottom line. Understanding basic economic principles is a great start and will allow you to set your prices correctly. But, that alone is not enough. You should also focus on creating recurring customer relationships and not discounting your products.
Additionally, you should make sure that you have the correct credit card processing in place. Having the proper hardware and software ensures that you can accept multiple forms of payment, which helps improve the customer experience. It also makes sure that you avoid paying processing fees when a customer chooses to use a credit card.
If you’re looking for a one-stop-shop payment solution, be sure to check out Nadapayments. Nadapayments allows you to accept all major forms of payment. It also provides you with the signage and software necessary to implement a surcharge program.
Ultimately, a surcharge program can add up to 3.5% back to your bottom line. Be sure to get started today and learn more about how a surcharge program can improve your business financials.