As a business manager, you can improve Gross Profit of your business by either increasing Sales Revenue or decreasing the cost of production.
1. INCREASE SALES REVENUE
- Increase Quantity sold. Simply sell more products. Managers can attract more customers to increase sales by using appropriate marketing strategies, e.g. innovate new products, enter into new markets, target new market segments. Or, change promotion methods, etc., or growth strategies, e.g. opening more shops, hiring more sales personnel, taking over another business, etc. Repackaging can also be used to make the product more appealing. However, this will raise the firm’s expenses.
- Change the price. The business can either increase the price or decrease the price. For elastic products managers should decrease the price to sell more while for inelastic products they should increase the price to boost Sales Revenue. In addition, either increase the price for complementary products, or decrease the price for products that are substitutes. Changing the price raises the value of each item sold. But, is likely to cause a fall in the volume of sales.
2. DECREASE COST OF GOODS SOLD (COGS)
- Lower raw materials costs. Managers can do it by negotiating better deals with current suppliers. Another way is to use cheaper raw materials or use less raw materials to make products. For example, offer smaller size hamburgers in the restaurant while charging the same prices as for bigger ones sold previously. However, this may impact product quality and customer satisfaction.
- Find new suppliers. Change suppliers and buy from those who offer lower prices of raw materials. However, finding cheaper suppliers without hindering quality can be problematic.
- Lower wages for production workers. This can be done either by decreasing wages per piece or per hour, or reducing the number of workers who make products. Alternatively, hiring cheaper workforce, but this approach may have negative impact on long-term productivity and quality.
- Lower packaging costs. Instead of using two or three different types of wrappers to package the product, the production department can replace excessive packaging with only one layer. Alternatively, the firm may ask some of its customers to come and pick up the products in person which will eliminate the need for any packaging to be used. This will allow the business to reduce packaging costs to 0.
- Use economies of scale. Managers can seek more cost-effective production methods such as producing many products in one batch rather than making each product individually. By using assembly lines to mass produce products firms can lower Average Variable Cost (AVC), thereby helping to raise Contribution Per Unit made from selling each unit of output.
To summarize, in order for the business to improve Gross Profit it should either increase Sales Revenue by selling more products, or decrease the cost of production.
