5 Ways to Rebuild Your Profit Margin

Last Updated Dec 9, 2009 7:10 AM EST

As the economy slowed throughout the year, many businesses raced headlong down the path of discounts and deals to retain customer numbers and survive the recession. Now, as the calendar flips over and we begin the long and rocky road to recovery, it might be time to think about whether, and how, we can rebuild our margins without losing our shirts. Here are five ways to emerge from the sales season with an eye to profitability:

1. Re-focus on the right products
You may have run a variety of promotions and offers in the last year. If so, your sales data will tell you exactly which types of promotion you might want to stick with for a while, and which you should kick into touch. These are the four signs that indicate the right products to promote:

  • Highly elastic - high volume uplift in comparison to the marginal discount
  • New volume - increased volume is not just switched from another product or pulled forward from future sales, but genuinely comes from the market
  • Halo benefit - generates an uplift in volume in non-promoted lines
  • Trade-up - promotions that move volume into higher margin items, where a portion of the new volumes sticks after the promotion
2. Consolidate the volume
A more focused and purposeful approach to promotions can help consolidate volume into fewer lines, creating the opportunity to bring in new innovations, and increasing leverage with suppliers. Both will help rebuild margin over time.

3. Target the valuable customers
Loyalty card or CRM data can identify the promotions that customers have bought into and, more importantly, where they have subsequently increased their frequency or breadth of shop. Even a simple analysis of average shopping baskets can tell you the overall profitability of customers buying into different types of promotion. The promotions consistently bought as one-off or small basket visits are the first ones to cross off the list.

4. Ramp up the differentiation
What are the messages you're giving to your customers? If you've been focused on discounts and deals, you can bet that your sources of differentiation have lost their prominence. If you're thinking of pulling back on discounts, make sure you're delivering, and communicating some fantastic differentiation.

5. First, test the water
A restaurant chain executive recently shared with me their experience of pulling out of a major discount message that they'd been running with for over six months:

"In the first week we lost 30% of sales; we lost our shirts and we lost our nerve," they said.

A week later the deal was back in. Pulling back from those big discounts is tricky. You need to know exactly what will fill the gap, and how long it will take for your customers to react. The only way to know for sure is to test. That way, at least you might get to keep your shirt.

(Pic: PinkMoose cc2.0)