How not to lose customers

THE beginning of the year is the ideal time for small and medium enterprise (SME) owners to explore additional revenue streams and other means of increasing their profit margins.

But the process is expected to present challenges owing to South Africa’s economic environment, which is not out of the woods.

While the South African Reserve Bank (Sarb) has increased the country’s economic growth outlook from 1.2 percent to 1.5 percent for the year, the economy has not recovered, which makes it difficult for businesses to secure avenues for increasing their profit margins.

The Sarb outlook is also far from the 5 percent required to meaningfully impact on poverty and unemployment.

The challenging conditions in relation to raising profit margins were confirmed by an analysis of the Quarterly Financial Statistics (QFS) released by Statistics SA over the 10 years between 2006 and 2016.

The report found that the average profit margin for the formal business sector declined, from 0.09 percent between June 2006 and September 2008 to 0.05 percent between December 2013 and March 2016, showing that each unit of turnover generated less profit in the later period.

While the decline in average profit margin appears to be minimal, it is important to remember that SMES account for only a portion of the formal businesses surveyed and were probably the hardest hit. Smaller businesses tend to be more vulnerable to sustained periods of low economic growth and increasing costs, compared to larger businesses who have the financial resources to sustain shrinking margins.

For SMES to sustain themselves, business owners should consider the following strategies for improving their profit margins:

Find out what your customers value

It is vital to understand how customers perceive value, and to what extent your business can raise prices while retaining its customer base. Identify your business’s unique selling point.

Acquire new customers

The most straightforward method to improving profit margins is to acquire new customers from existing markets or industries, away from other players and competitors.

Get comfortable with costing structures

Understanding costing structures, income and expenditure is crucial to managing and driving profit margins. A profit margin is made up of variable and fixed costs. Variable costs are incurred when producing or selling a product, while fixed costs, such as rent and wages, are payable regardless of whether the business sells anything. It is important to consider the costs when pricing products or services.

Manage variable costs

It is important to acknowledge that increasing prices might not be viable due to the reality that many business owners operate within the confines of limited economic growth and decreasing customer spending. As such, managing variable cost is the next step when reviewing profit margins. For example, business owners should aim to negotiate discounts with suppliers or explore the use of alternative suppliers that can provide the same products or service at a lower cost, without compromising on quality. Businesses can incentivise staff to deliver greater output during the same hours.

Don’t lose sight of your business plan

Whichever option a business owner might choose to maximise profit margins, it is imperative to refer back to the business plan regularly. This should secure longterm business success.