Business 101: If your profit margins aren’t growing, neither is your business; and if your business isn’t growing, it’s losing.
First, let’s get on the same page. Profit margin is a percentage of your business’ net profit per revenue dollar. There’s some math involved in figuring it out. Using very round numbers for example:
- Total revenue (sales) = $1,000
- Minus cost of goods sold = $500 (COGD includes costs such as procurement and sales staff.)
- Minus operating expenses (overhead) = $200
- Equals net profit = $300
- Profit margin = 30% [Net profit ($300) divided by revenue ($1,000)]
Looking at the calculation, you can see there are only two ways to increase profit margin: Either increase sales or reduce expenses.
With that in mind, let’s take a deeper dive into those strategies.
Think long and hard before simply raising prices. That can turn off customers, which could actually reduce overall sales. If you depress sales and costs remain the same, simple pricing will drag down your margin.
If you decide to bump your prices, try the boiling frog strategy.
According to that theory—I’ve never tested it—a frog dropped into a pot of boiling water will jump out. On the other hand, if you put the frog in lukewarm water and gradually turn up the heat, you’ll soon have a nicely poached frog.
The point is, ease your prices up. Customers might not even notice. Nothing is getting any cheaper in today’s economy, right?
Think of gas prices. When they shot up in 2021, people cut back on their driving, lowering demand for fuel, which brought the prices down to where motorists started motoring again.
In a perfect world, business owners could simultaneously reduce costs and increase revenue and laugh all the way to the bank.
We do not do business in a perfect world, though, so let’s concentrate on streamlining expenses.
If you run a retail music business, ask your wholesaler for a price break on bigger orders. Of course, you’ll have to evaluate how fast you can sell that merchandise. Sitting on inventory means it’s not earning for you; you may even incur additional costs if you have to rent storage space.
But take a critical look at your procurement practices. Do you only order a three-month supply of a product because that’s the way you’ve always done it? Evaluate sales and inventory and determine whether you could save in the long run. Another possibility is to research other suppliers to see if you can get better pricing for the merchandise you already carry.
When it comes to reducing operating costs, take a look at your overhead. If you are a music retailer, do you leave the AC or heat running after business hours? Power down your computers and other electronics at closing time. Assuming your revenue stays the same, reducing sales and operating expenses will have a positive impact on your profit margin.
Of course, there is the counterintuitive solution: Increase expenses to increase revenue. One way is to invest in marketing. A strong online and social media presence has the potential to reach a larger market, which could translate into more sales. As long as the sales exceed the cost (a positive return on the investment) you should see a bump. A 20% margin on 50 saxophones sold always beats a 20% margin on 5 saxophones sold.
Investing in marketing applies to musical artists as well. Increasing your reach can draw in new fans, which has the potential to lift ticket sales—even increase prices—as interest in your music and/or performances. “Jumpin’ Jack Flash” is 3 minutes and 42 seconds long whether it’s played at a small pub in London or Wembley Stadium.
You could also look into opportunities to have your music licensed for commercial use in films, on television, or for advertising. Through streaming services, you could generate income when fans download your music. Recording the song once and then selling it multiple times—that’s increased sales at zero additional cost, which is the best of all possible worlds.
This last idea is great for both retailers and musicians alike—sell (cool) merchandise. People love sharing what they’re into … pets, sports teams, hobbies, bands, etc. Whether it’s a hat, t-shirt, or license-plate cover, there’s probably a customer ready and waiting. You can jack up the price to more than cover the expense of buying them. That makes for a very healthy margin, which makes merch definitely worth considering.