Brian owned a successful pharmacy business with sales of $6 million per year who had recently noticed a large slip in its profit margins. He contributed the reduction in profitability to DIR fees, Claw Backs, Negative reimbursement and audits and he wanted to know how to improve margins. He noticed that the cash business of 15% produced almost 30% of the overall gross margin. He also noticed that the number of prescriptions processed in his pharmacy are up 10% as compare to the previous year and still the margins continues to cut annually. In order for you to serve your customers, pay your employees, and reward your investors (yourself or outside investors), your business must be profitable. Your margins are a measurement of your profitability.
The most easily understood margin is your "operating profit margin." This number is simply a calculation of how much of every dollar in sales ends up as operating profit (pretax) for your business.
For example, if you had $10 million in sales and ended up with a pretax profit of $2,500,000, your operating profit margin would be 25 percent. Your operating profit margin is a great measure of how profitable your business is overall.
Building on Brian’s $6 million-per-year pharmacy, if you were able to go from a 15 percent to a 20 percent operating margin by better managing your expenses, increasing your cash business and controlling your inventory, you'd earn $300,000 more profit from that same $6 million of gross revenue.
That 5 percent increase in operating profit margin equals a 20 percent increase in profit.
Your gross profit margin is a measure of how much money you have left over from every sale after you take out what it cost you to produce or acquire the product or service you just sold.
Here are five concrete tips to help you improve your margins over the long-term:
1. Inventory turn. The faster your turn your inventory the more profitable you are. This in turn means improved profit margins.
2. Up-sell and cross-sell to increase your average unit of sale.In general, when you increase the amount you sell to your customer at one time, you'll improve your margins because you'll be increasing the purchase velocity and therefore lowering your cost per sale in terms of overhead burden. So how can you increase your average unit of sale per customer? Can you up sell to richer offerings? Can you process larger units of purchase? Can you cross sell complimentary products or services?
3. Cut low-margin clients, products, or services, and invest the saved time and money in higher-producing parts of your business. This presupposes that you have accurate and timely reporting that shows you which clients, products, or services produce what margins. Assuming that you do, review a "margin analysis" of your key products, services or customers to see which are most and least profitable.
4. Retention, retention, retention.Attrition costs. Do all you can to keep your patients actively patronizing you. Study the most common "drop points" in your client's purchase history. Can you strategically reinforce your business system to reduce that attrition? Perhaps you need to better communicate with them how to use your product or service? Or give them a well-timed "gift" or make a well-timed visit or phone call?
Courting your current customers eliminates or greatly reduces the acquisition or marketing cost on that second and all later transactions.
5. Watch out for scrap, spoilage, and wastage. Is it a quality issue on production? Are you poor at forecasting, and keep too much supply on hand for an order? Does it take you too long to sell your inventory and you lose part of it to obsolescence ? This can also be an issue in areas of your business outside of operations, for example
And which of these tips did Brian's company use to triple their operating profit margin?
A combination of reducing scrap, reducing expedites by refining their core pharmacy process so they met contractual delivery timelines without expensive rushes, and by intentionally focusing sales efforts on selling their highest margin products which is the cash customer. Now you can drive more cash business to your pharmacy by using data from your custom-made cards.