6 Ways to Improve Your Gross Margins

This is the final blog post in a two-part series about gross margins. Click here to read our first blog post, “Understanding Your Gross Margins.”

Gross margins serve as a compass, guiding your business toward profitability and protecting against potential financial pitfalls. Regular assessment and optimization of gross margins are essential for maintaining a strong financial foundation. Here are six ways to improve your direct-to-consumer gross margins:

Merchandise Strategically: Sell More Volume of Higher Margin Products

One effective way to improve gross margins is to strategically merchandise your products. Focus on selling a higher volume of items with higher profit margins. This involves understanding customer preferences and strategically placing and promoting those products. Conduct market research to identify top-selling items and capitalize on consumer trends. Additionally, consider bundling complementary products to encourage customers to purchase more.

Reduce Waste: Combat Theft, Spoilage, and Shrinkage

Waste in any form negatively impacts your gross margins. Combat theft, spoilage, and shrinkage by implementing inventory management systems. Use technology to track and monitor stock levels, set up security measures to prevent theft, and implement a first-in, first-out (FIFO) inventory system to reduce spoilage. Regularly review and adjust your inventory control processes to minimize losses and maximize profitability.

Reduce Purchasing Costs: Negotiate with Suppliers and Buy in Bulk

Strategic procurement is a powerful tool for reducing purchasing costs and improving gross margins. Negotiate with suppliers to secure bulk discounts and better payment terms. Buying in bulk not only lowers unit costs but also minimizes the frequency of reordering, which reduces administrative costs associated with procurement. Regularly assess and renegotiate supplier contracts to ensure you’re getting the best value for your purchases.

Increase Value-Add Production

Adding value to your products may improve your overall gross margin. Explore opportunities to process or package your products in ways that increase their perceived value. This could involve a change in a product’s physical state (ex: milk to cheese, fruit to jam), offering ready-to-eat options, or developing branded packaging. Value-added production not only differentiates your products in the market but also allows you to charge higher prices. If you are new to value-added products, make sure you have command of your costs (including labor) to ensure that there is, in fact, a solid resulting gross margin. Remember, you don’t necessarily need to do value-added products in-house. If you have a co-packer in your area, you can lean on this service and price your products accordingly to avoid the operational risks and headaches of in-house production.

Increase Pricing Strategically

Many of our clients are hesitant to raise their prices, but this is an effective tool to control your gross margins. With some simple strategies, you can confidently raise your prices while minimizing customer churn. Do thorough market research and pricing comps to understand how much customers are willing to pay for your products. Will you increase prices on select products, entire product categories, or all products? Small price increases, especially for popular items, can help you make more money without upsetting your customers. Clearly communicate significant changes in pricing, emphasizing the value they receive. Generally, you should regularly monitor your product margins, and tweak pricing based on recent cost variations.

Management Incentives: Aligning Goals for Success

Encouraging and rewarding management and staff can be powerful in improving gross margins. Your incentives should be informed by your financial goals (margins), but implemented operationally. For instance, if you produce milk from a dairy herd and make cheese with it, your farm manager’s goal could be tied to pounds of milk produced, and your cheese maker could be based on the number of labor hours to turn that milk into cheese. This not only motivates the team to work towards common goals but also fosters a sense of shared responsibility for the financial success of the business. Clearly communicate the incentive structure and regularly review and adjust goals to maintain relevance.