Like many people, you might think that achieving business success involves having sky-high sales and revenues. However, you have to realize that this is only part of the equation. It is actually possible for companies with tons of sales and brand recognition to flop — look at what just happened to American Apparel! If you want your company to succeed, you need to focus on increasing your profit margins.
The Hows And Whys Of Profit Margins
Profit margins are used to measure the financial health of a business and are expressed as percentages. They are calculated by dividing the markup on the item by the price at which it sold. If you sell your product for $100 and you’ve spent only $20 to make that product, you have a markup of $80. So what is the profit margin? In this case, it’s very easy to determine: 80/100 = 80%
In this case, the markup is actually the same as the profit margin. But in real life, it gets a bit more complicated, because in real life you almost never buy products directly from the manufacturer. If the product is sold by retailer for $100, and they bought it from the manufacturer for $40, the situation changes dramatically. Now, the manufacturer has a profit margin of only 50% (20/40), while the retailer, with a markup of $60, receives a margin of only 60% — significantly less than the 80% margin in the simpler example.
Remember: the numbers above represent gross profit margins only. They only account or the price paid to buy and sell the item. There is no accounting for all the various overheads that have to be met in order for this buying and selling to happen. Factor all those in, and you get your net profit. If your gross margin are less than 50% at any point in the distribution chain, you’re not likely to have a marketable project.
Basically, the higher your profit margin is, the better it is for your business. With high margins, you’ll have enough backup funds that will help you withstand the challenges you’ll go through, such as having to give refunds to customers or experiencing slumps in sales. You’ll also have enough firepower to grow your business and expand your market share.
A lot of entrepreneurs believe that the only way to enjoy high-profit margins is to increase their prices. This could work, especially if they had just discovered that they’ve been under-pricing their products and could actually afford to sell them at higher rates.
Unfortunately, this isn’t always the correct solution. Raising prices can discourage consumers (particularly those who are on a tight budget) and push them to look for cheaper options. Even if entrepreneurs can justify their price increase by pointing out the advanced features that their products have, it could still take months or even years before customers can be convinced to purchase from them again.
So, whether you’re an inventor who’s working on his first product or a business owner who’s expanding his product range, you shouldn’t just depend on price increases to earn a profit. Remember: there are other ways to ensure you’ll enjoy high earnings, and one of these is to create a profitable product design.
Designing A Profitable Product
In most (if not all) cases, your profit margins are determined not just by how they satisfy your customers but also by how they are made. Because of this, you need to retrace your steps to the design and conceptualization stage and ensure that your product design allows you to earn high revenues while reducing costs. Here are a few tips to help you get started:
Know what customers need and want
Even if you create the most elegant and affordable product design ever imagined, it would still be useless if no one wants to buy the thing. So, before you sit down at the drawing board, get out there and find out what your target market really needs.
Start by identifying who should buy the product you’re developing. By having a clear idea of your target audience, you can come up with features that address their primary problems and make their life easier. You can also fine-tune the design so that it perfectly fits their preferences and ensure your product will catch their eye.
Once you know your target market, you can conduct studies that would tell you what your potential customers are looking for in a product. These can involve online polls, paper-based surveys, and face-to-face interviews. You can even have casual chats with people who you think would be interested in your product and listen to what they have to say. Do everything you can to gather relevant data and find out how you can satisfy your customers’ needs and wants.
Find ways to reduce component costs
Even the most innovative and groundbreaking products are made of common or at least existing components. So, after designing your product, list all the parts that you need to put it together and determine the price for each part. When you’re done, figure out how you can reduce the total amount you’d spend on these components. Doing this is important since lowering your overall costs can greatly help in increasing your profit margins.
But how exactly can you spend less on components while still ensuring the quality of your product? There are several techniques that you can use, which we discuss below:
Finding the right vendors
Most vendors offer parts at similar prices, but remember that even the smallest difference in prices can result to large savings over time. So, look for a company that can provide you with high-quality components at the lowest possible prices. You can even try to negotiate a deal with them; for instance, you can ask your vendor if they could offer you discounted prices when you order parts in bulk.
Using cheaper or lower-performance parts
This can go several ways. One thing you can do is to substitute a certain component with a lower-cost version that has the same function. If it’s possible, you can swap out a high-performing component with a lower-performing one that still meets the specifications you need. For example, if your design calls for a 120V motor but you find that a 110V motor will work just fine, you can substitute it to reduce your costs.
Using more expensive parts to reduce part count
Sometimes, it makes sense to use pricier parts that can replace two individual components with one and/or reduce your assembly and handling costs. It might cost more money upfront, but you’ll get to enjoy bigger savings in the long run.
Get help from the pros
Product design experts have years of experience in the industry and have mastered different techniques to reduce production expenses. With their skills and knowledge, they can go over your design and make several changes that will help you lower manufacturing costs. For instance, they can find ways to simplify your manufacturing process and use fewer parts to build your product. They can also point out which materials and components you can substitute to reduce your overall production expenses.
Aside from helping you lower your costs, professionals can also improve your design to ensure that your product will have excellent features and great performance. These, in turn, will convince customers to purchase your product, increase your sales and revenues, and help widen your profit margin.
Experiment with different designs
One of the biggest mistakes that entrepreneurs make is holding on to an existing product design even when there is no realistic prospects or indications for marketability. Some do so because of sentimental reasons (e.g. it was the first idea they came up), while others cling to the hope that things will get better soon, all the while pumping more time and money into the project. You shouldn’t make the same mistake, though. As soon as you notice that your product is experiencing steadily declining sales, it’s time to take a closer look at it and find out how you can improve its design.
A good way to start is to identify the features that attract many customers to your product. What can you do to reinforce the function, performance, and aesthetics of these attributes? What similar features can you add to your design to make your product even more appealing to your target market?
You should also identify the features that your customers don’t really care too much about. Are these attributes well-liked by a handful of your target audience, or does no one really like them? If it’s the latter, you might want to consider dropping them altogether since they’re costing you money without bringing in profits.
However, if you discover that some people do like these features, you might want to remove them from your basic product design and instead offer them as a paid add-on. Microsoft, for example, has realized that not all Surface Pro 4 customers have the money to pay for the tablet and its keyboard. Because of this, they sell the Surface Pro 4 tablet as a standalone device, and those who want to have a keyboard can purchase the Type Cover accessory separately. This allows Microsoft to cater to customers of varying needs and income levels while earning revenues from a feature that not everyone can afford.
Start Designing With Cad Crowd
High profit margins start with smart product design. Fortunately, whether you’re still in the conceptualization stage or just need help with a few final issues, you can always count on the experts at Cad Crowd to help you. Our team of product design freelancers can go over your designs and ideas and come up with ways to further lower your manufacturing costs and help you save more money. They will also give suggestions on how you can improve your design and create a product that will make you stand out from your competitors and pique the interest of your target market.
Once you’re happy with your product design, our designers can help you move forward to the production stage. They do this by using modern CAD and CAM software to create files that are ready for rapid prototyping, 3D printing, and other production methods. Cad Crowd can even assist you in looking for an experienced and reliable manufacturer near you! We have a large network of manufacturing companies and can point you to one that has the latest equipment, offers value-added services, and uses production methods that lower overall costs.
Let us know about your project today, and get a free quote.
