Six Ways to Increase Profit Margins
“We have more sales than we’ve ever had…but we don’t seem to be making any money.”
Last month, I was speaking with a long-time client of ours. When I asked, “How’s business?,” the owner of this company told me that from a sales perspective, things couldn’t be better. Yet the company was struggling with cash flow.
Thanks to a combination of aggressive competition, hard-negotiating clients, and unbelievable insurance costs, this company’s margins had fallen to just over 50% of what they were a few years ago. The owner, who is a very sharp lady, was in a quandary. What should she do?
At first, I did not have an answer. This is a well-run business with a long track record of success. But as I thought about her company, I realized this company needs to make a major change or the commodity pressures it is facing may very well put the firm out of business.
How to Increase Margins
If you’re reading this article looking for an easy, “no work, no pain” way to boost your margins, you’re going to have to look elsewhere. Unfortunately, there is no magic cure. Improving profit margins requires major strategic changes to your business, but if you’re serious about becoming more profitable, consider these ideas:
Damn the Competition
The most basic way to increase margins is to increase prices. If you’re currently earning a 15% gross margin, and you want to increase it to 25%, increase your bill rates by 10%.
Of course, this strategy may come at a big cost. You’re going to lose clients. In fact, you’re likely to lose every client that’s unwilling to pay higher rates, and unless your services are noticeably better than your competition, you will have a very hard time finding new clients.
The idea with this strategy is to become a boutique…a specialty firm known for doing one thing very well. Boutiques are able to charge more because they offer something that you cannot easily get anywhere else.
What is that one thing? It depends. Some staffing boutiques specialize in very specific job functions. Others specialize by industry. Some boutiques emphasize service while others focus on location. And as remote work becomes the norm, staffing boutiques may specialize in staffing virtual roles.
The key to running a successful boutique is to serve a very specific niche market. You want to select a client base that is willing and able to pay higher prices, and one that cannot easily get what you offer elsewhere.
And as you might guess, boutiques are not about high volume staffing. As a boutique, you win the battles one client and one order at a time.
Fire Your Clients
If you’re constantly facing margin pressures, the problem may be your clients. Some companies will always be price buyers. Some only care about “commodity-level” service. Others are able to choose from lots of seemingly identical staffing vendors, so low price wins. And finally, some companies may be in industries that simply cannot afford to pay more for better quality or service.
The key to making this strategy is to refocus your sales and service efforts on companies that demand higher quality people and service. Who are these dream clients? It varies; however, they are typically small to mid-sized companies, companies that are committed to quality and excellence in what they do, and companies that are experiencing some sort of staffing challenge (which may be due to rapid growth, a need to fill difficult positions, or excessive turnover).
Your challenge is to first identify the companies in your market who are willing to pay more, understand the reasons why they will pay more, and then retool your business to consistently deliver the people, service and value these clients demand.
Change Your Business Mix
It’s no secret that margins in low skill positions are less than those in high skill ones. To boost margins, simply change your mix of business.
Of course, this is easier said than done. In the past, we have literally worked with hundreds of owners who wanted to reduce the percentage of LI business in favor of more clerical or professional staffing, yet few of these companies want to make the changes that are needed to shift their business mix.
As anyone who sells staffing knows, selling professional level staffing is different than industrial staffing. And selling direct hire services is different than temp. So how do you make the transition?
Typically, it requires one or more of the following:
- Hire new salespeople (who are capable of selling higher level services)
- Hire new service staff (who can recruit for these positions)
- Open new locations or update offices to appeal to higher level candidates
- Implement new marketing to open doors to sell higher margin services
- Provide lots of training and feedback to staff to aid in their transition
The hard part about changing your business mix is that it often means you need to change your business. To be successful, you have to make a commitment to the business changes that are necessary to sell and service higher margin services.
Change Your Focus
Sometimes, there’s little (or nothing) that can be done to make a significant improvement in margins within the confines of your current business operations. So what do you do in these cases? You change your focus.
Changing focus requires a major shift in your business. It can include entering new niche markets, expanding your range of services, or expanding into new geographic markets.
But beware, all of these options are very risky. If you’d like to know more about the risks (and opportunities) associated with making a change of focus, please check out this past issue of The Idea Club on “Natural Market Extensions.”
Move Up the Food Chain
Several years ago, we worked with an industrial staffing firm that consistently produced margins that were far above industry averages. What was the secret to their success? They didn’t sell temporary staffing.
What this company sold was a high return on the investment in staffing. They focused their sales efforts on CEOs, CFOs, and other executives who truly cared about ROI and not mark-up. They developed great marketing to get senior execs actually interested in staffing. And most importantly, they made changes to their operations that allowed them to measure and deliver on their promise of higher ROI.
What this company did was change the product they sold. They were no longer in the commodity industrial staffing business, they were in the consulting business offering productivity solutions for manufacturers and distribution centers. They discovered that by focusing on the real result their firm could deliver, they could make more money than by simply focusing on filling orders for temps.
Over the years, we have consistently seen that staffing firms that are able to position themselves as true solution providers (and not simply staffing firms) are able to sell at higher levels and avoid most of the commodity and margin pressure that comes from the lower levels of the HR and procurement departments.
Growing up in the staffing industry, I remember my dad telling me that there are few economies of scale in this business. The advantages that the WalMart’s of the world have in their industries simply don’t translate to staffing.
And to a large extent, Dad was right. Every order has to be filled one a time, and most of the industry pays sales and service people on a commission plan making a large percentage of costs variable.
However, after working with some larger companies (and even some industry groups), I’ve seen lots of examples of economies of scale. These can occur in recruiting, marketing, insurance, technology and other S, G & A expenses.
If you’re looking to improve profit margins, one solution is to get bigger and take advantage of both spreading fixed expenses over a larger base as well as taking advantage of volume purchasing power.
In the staffing industry, there are two ways to get bigger. 1) You can actually expand your business by opening new offices or acquiring competitors. Or 2) You can join CEO networking groups (such as ASGroup or Presidents’ RoundTable) to leverage your buying power and improve your net profit.
When it comes to managing margin pressures, there are no easy answers. Whatever path you choose will require serious strategic changes to your business…and not making these changes may be the biggest strategic risk of all.