As a music business owner, what would be your first solution to reverse a downward trend in your profit margin?
A lot of people in that position might default to increasing prices. More revenue means a healthier bottom line, right?
Maybe. All things remaining equal, it probably would.
But what if the higher prices had a negative impact on sales when your customers took their purchasing power to competitors. Or what if your costs and overhead simply ate up whatever new revenue your price-hike generated? In the age of perpetual inflation, that’s more than likely.
What to do, what to do?
The first thing to do is make sure we’re on the same page when talking about profit margin.
It’s a financial metric that is expressed as the percentage of net profit divided by revenue. (Net profit is revenue, less operating costs and overhead.)
Understanding that, you can see there are only two ways to increase profit margin: Increase revenue (which is NOT the same as raising prices) or reducing costs.
What Are Ways to Increase Revenue Without Raising Prices?
Put on your thinking cap. Talk to your best customers. Get your employees’ input. There are a dozen ways to increase revenue without raising prices or getting steamrollered by new costs. In fact, none of these ideas will have much impact on overhead, so why not try:
- Adding new products or services based on customer and market research.
- Develop customer loyalty programs that encourage repeat business.
- Bundle offerings (offer a discount on some lessons with an instrument purchase.)
- Cross-sell (What instrument doesn’t need accessories?)
- Up-sell (This is a fine beginner instrument, but for a few dollars more, you won’t have to buy another until you’re ready for the philharmonic.)
Don’t forget to review your pricing strategy to ensure whatever it is you are selling to ensure it reflects your customers’ perceived value of it. And part of that value is service—before, during, and after the sale—so creating a buyer experience that delights your customers may let you slip in modest price hikes.
If you have no choice but to raise your prices, go slow. Literally, go as slow as “boiling a frog.” If a frog is suddenly put into a pot of boiling water, it will jump out and save itself from impending harm. But, if the frog is put in lukewarm water, with the temperature rising slowly, it will not perceive any danger to itself and will be cooked to death. (Biologists say that’s not true, but you get the point.)
How Does Cutting Costs Pay Off in a Healthy Profit Margin?
If you’re working with a wholesaler, ask for a price break on larger orders. You don’t want to get stuck with excess inventory, though, so be shrewd about this tactic. Storing inventory is a cost, and doesn’t turn into revenue until they are sold.
Still, don’t stick with ordering a three-month supply of a product because that’s the way you’ve always done it. If you think you can cut costs by buying more, evaluate sales and inventory, and determine whether you could save in the long run. Another possibility is to research other suppliers to see if you can get better pricing for the merchandise you already carry.
Additionally, you could save money by looking at overhead costs. Don’t run your utilities after closing time; AC and heat (electric, fuel, oil, or gas) use a lot of money when nobody’s there to care. Power down the computers at the end of the day; they are money sinks when nobody is using them. By saving on utilities and other expenses, you’ll increase your net profit, which positively impacts the profit margin.
Sometimes you have to spend money to make money.
One cost that is a proven revenue generator is investing in your marketing strategy. A strong online and social media presence will help you reach a larger audience and generate greater sales. Online marketing can create more desire and subsequent demand.
What if you’re on the performance side of the music business? Investing in marketing applies to you as well. By increasing your audience and interest in your music and/or performances, you’ll be able to command higher income and subsequent profit margins. “Jumpin’ Jack Flash” is 3 minutes and 42 seconds long whether it’s played at a small pub in London or Wembley Stadium.
You could also look into opportunities to have your music licensed for commercial use in films and television—even advertising. Through streaming services, you could generate income when fans download your music. Recording the song once and then selling it multiple times, that’s profit margin.
This last idea is great for both retailers and musicians alike—sell (cool) merchandise. Whether it’s a hat, t-shirt, or license-plate frame, there’s probably a customer ready and waiting. You can up-price these to the moon, so they are definitely worth considering.