Cameron Herold breaks down two main ways to boost gross margins: raise prices at least 2-3% yearly and renegotiate supplier costs regularly. He also shares a rule for inventory businesses: multiply your gross margin percentage by inventory turns, and aim for at least 240 (so 40% margin times 6 turns works).
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Do you ever feel like in your business you're trying to just make more with less and struggling to pay the bills and struggling to hire people and you're kind of wondering why you're working so hard, but you kind of be moving sideways? The one core area to focus on. I was just looking back at some notes from a company that I coached for four years. I coached a company from about 3.2 million to 52 million over four years. And one of the big things that we focused on was gross margins and how to consistently increase the gross margins in the business. So gross margin is your revenue minus your cost of goods sold. So we often don't go back to our suppliers and negotiate. We often don't raise our prices. But those are the two core areas that you have to be working on. Your overhead. You can continue to waste money in there as well, but we'll talk about that in a second. So every year you should be raising your prices. Every year you should be looking to raise, at least to keep up with inflation. But every year you should be looking to raise Your prices by 2 to 3% minimum, if not more. I remember when I walked into 1-800-God- junk 20 years ago this week and no one was making money. The head office wasn't making money. Franchisees weren't making money. So we raised our prices by about 40% across the board. We went from $338 a full load to find 550 or 458 a full load. And we did that across the entire system because there's no way we were ever going to make enough money charging so little. Our margins were just going to be small when we had to take into account our, our labor and gas and dump percentages. So. And we couldn't really negotiate those. So for your business today, look, to raise your prices, we actually wanted to become the Starbucks of junk removal or the FedEx of junk removal. So we charged a premium. You know, you think about in the coffee shop businesses today, you can go get coffee at Circle K, or you can get it at Dunkin Donuts or you can go and get it at Starbucks. You can go to Walmart and get a coffee. You know, Starbucks used to be the more expensive coffee shop, but not anymore. You can go to all these new hipster coffee places and you're paying, you know, $8 for a coffee, which is crazy, but people are paying it. So get your pricing into a level that allows you to make money is the first area. Secondly is every six months to a year, go back to your suppliers and look to renegotiate. You'd be amazed at how little or how, how infrequently people actually renegotiate with their suppliers on costs. But everything is negotiable. And especially now where, you know, businesses are tougher, people are willing to give some discounts out there. So if you go out and actually ask for those discounts, ask for those cuts, you'll probably get them. And you'd be amazed across the board where you can get those as well, including right down to even getting credit card fees negotiated. So taking a look at your cost of goods sold, renegotiating those down every year, and taking a look at your revenue and making sure that you're charging enough to make sure that you have a really, really solid gross margin, because that gross margin is what has to pay for all of your overhead. Then you can take a look at your overhead in your business and look to get rid of any of the waste there, but really looking for healthy gross margins across everything and killing off any of your products or services that you don't make any good gross margins on. You know, often people are spending time working on parts of their business, working hard, but not necessarily making enough gross. And the pain in the ass factor of that product line or service is much higher than the reward that you're getting from it. So take a look to even get rid of some of your low gross margin products and services. And that can be helpful as well. Lastly, if you're in the inventory business, where you carry inventory, you need to be working towards a 240 number. And what that is is your gross margins multiplied by your inventory turns has to equal 240 or greater. So as an example, if you have a 40% gross margin on your products, let's say you're selling on Amazon, you have to turn that inventory six times. It's six times 40% gross margin to equal 240 to have an optimal business. If you're selling less than that, you're going to be losing money. You'll just go sideways. So if you think about someone who has, you know, 80% gross margins, like really big gross margins, they only have to turn their inventory three times. Look at someone like Walmart that operates on very, very low gross margins. As soon as a product goes out the door, they're reordering it and coming back to their shelves. So they might be operating on 10 or 20% gross margin, but they can do it because they're turning inventory 12 times. So those are some opportunities to think about in your businesses today.
