Want to Grow Your Margins? Focus on Value

A male business owner with glasses stands in an aisle of fabric and takes notes of his inventory on yellow paper.

Companies looking to charge more for their products are in a tough spot competing against the "Everything Store."

Winning with higher prices isn’t easy. If retailers want to grow their margins by charging more, their products need to truly be better than what their customers can track down online (and buy with two-day shipping).

Delivering more value to customers is key to charging more without losing market share to less expensive offerings. If you’re looking to make changes that could potentially grow the margins on your product lines, the following ideas can help you craft a winning strategy.

Focus on Long-Term Relationships

Loyalty is key to margin growth, and service experiences can be major differentiators for small businesses against Amazon and other big brands. Find ways to augment your offerings with service components that extend the customer relationship and support high-value, high-touch interactions.

That can include services like maintenance plans, "VIP access," or free trainings or consultations. Such benefits can enhance value in relation to cost while driving return purchase activities that bolster long-term customer relationships and take full advantage of the employees who set your small business' service value apart.

Maintaining employee satisfaction is key to maximizing "relationship value" for smaller companies, as it helps ensure retention of both your staff members and the customers who rely on them. It also ensures you maintain the trust that's necessary to grow your margins over time: A recent Salesforce survey found that 86% of consumers were willing to "pay a little more to work with a small business," with "continually great customer service" being their top reason.

Coupling strong customer relationships with personalization can also help “premium” products outsell more standard counterparts. A full 80% of consumers say they are more likely to do business with a company that offers personalization, and those with a positive outlook on personalization shop more frequently. Effective personalization, however, requires strong customer intelligence.

Use "VIP memberships" and other loyalty programs to cultivate customer data and apply it toward personalized marketing emails and promotional offers that drive long-term engagement. Segmenting consumers based on their shopping activity across price points—and making targeted recommendations driven by past purchase behavior—can help you guide high-value customers toward the high-value items they’re most likely to buy.

Consider and Reimagine Your Business Models

Loyalty data should also help you better understand customers’ needs now and in the future. The information may even point you toward new ways of pricing, selling and merchandising your products.

Rethinking sales and revenue models can be an impactful way to expand margins—especially if an existing approach is ripe for a recurring-revenue opportunity. Use data to understand how often your shoppers make return purchases, and to test approaches that might get them back faster, more frequently or even automatically.

The popularity of subscription boxes, for example, has led companies to get more creative about what they can sell and deliver in a time-staggered manner.

Subscriptions for low-margin products—like Dollar Shave Club’s $1 razors and Ipsy’s beauty samples—still make up a big chunk of the “box” trend, but it also supports more expensive and curated offerings. Nike is reportedly rolling out a kids’ shoe subscription, for example, and Coca-Cola is testing an Insiders Club in which members get to try a box of new beverages each month. Small business entrepreneurs shouldn't be afraid to test subscription-friendly versions of their own products. alternatively, some report that getting their goods into popular subscription-box services helps elevate both exposure and sales.

Tiered pricing options can also work, so long as your products really deliver differing levels of value for the varying rates customers pay. If that’s the case, marketing on the desirability of the upper-tier offering can help compel upsells or upgrades among customers who already own the standard product.

Think Wisely About Add-Ons

Selling a product at a higher tier tends to mean offering it with additional options. Companies have to be careful there, however. Loading in extras that don’t elevate the product, just to deliver more for more money, can undercut your success in the long run.

Ancillaries drive revenue when they’re both wanted and selected by the customer they’re designed for—not when they’re shoved into an existing product. If a significant percentage of your shoppers are clamoring for “add-ons” you know they’ll pay for, find ways to make those things easier to understand, select and pay for.

Airlines, for example, count on flyers selecting special options over the course of their ticket-buying and travel experiences. Add-ons like extra legroom, wi-fi, and baggage fees are a boost to airlines’ profit margins—adding up to between $50 billion to $55 billion in ancillary revenues annually—and the ease with which customers can buy these add-ons through self-service online interfaces has a lot to do with their success. (Customer service and the sales efforts of frontline employees are important for them too, according to McKinsey.)

In other environments—such as car dealerships and retail stores—in-person service and smart merchandising are necessary to drive customers’ attention toward optional products.

Across the board, robust training and smart sales incentives can complement online strategies and support further success. Small businesses can mimic larger peers by empowering all employees to bring a business-development mindset to their job duties, for example; encouraging staff to bring up the potential for referrals during or after customer interactions, or incentivizing them to upsell, can help improve profit margins.

Ultimately, the more educated your staff is on the value, convenience and long-term quality of your products (add-on or otherwise), the better. It can only help more customers learn why your goods are worth paying for at margin-growing prices.

The views expressed by the author are not necessarily those of Fifth Third Bank, National Association, and are solely the opinions of the author. This article is for informational purposes only. It does not constitute the rendering of legal, accounting, or other professional services by Fifth Third Bank, National Association or any of their subsidiaries or affiliates, and are provided without any warranty whatsoever. Deposit and credit products provided by Fifth Third Bank, Member FDIC.