Practical ways to increase profits for small businesses

Published Thursday 2 April 2026

Table of contents

• Profitability factors
• Ways to increase business profitability
• Increasing revenue to increase profits
• Decreasing costs to increase profits
• How to increase gross profit
• How to increase net profit
• Track and improve profitability with Xero
• FAQs on increasing profits

Key takeaways

• Focus on your most profitable customers by analysing revenue versus cost to serve, then direct your marketing efforts towards acquiring similar high-value clients while considering price increases or reduced service levels for low-margin relationships.
• Implement accurate pricing that covers all your true costs including materials, labour, overhead and hidden expenses, then add contingency buffers and update your prices regularly as supplier costs and market conditions change.
• Prevent scope creep from eroding your margins by issuing change orders for any extra work requested after a project starts, and bill for these additions immediately rather than waiting until project completion.
• Review and reduce indirect costs like sales and marketing spend, discretionary expenses, and professional service fees by calculating return on investment for each expense and choosing specialists who offer flat-fee pricing over hourly billing.

Profitability factors

Profit is what's left of your sales revenue after paying your costs. The main profitability factors are your revenue, your costs, and the gap between the two.

• Revenue: the total money from sales, which increases the pool you can draw profit from
• Costs: the expenses you pay to run your business, which reduce your profit when they rise
• Gross profit: the money left after paying direct costs tied to providing your goods and services, known as cost of goods sold
• Net profit: the money left after paying all business costs, including taxes

Ways to increase business profitability

Increasing profitability comes down to a few core strategies. Before diving into the details, here's an overview of the main approaches.

• Grow revenue strategically: Increase sales through new customers, repeat business, or higher prices
• Reduce costs intelligently: Cut expenses without compromising quality or capacity
• Optimise your pricing: Ensure your prices cover true costs and reflect the value you provide
• Focus on profitable customers: Identify and prioritise the clients who contribute most to your margins
• Improve operational efficiency: Streamline workflows to reduce waste and boost productivity

Each of these strategies is explored in detail, starting with revenue growth.

Increasing revenue to increase profits

Raising revenue is a common way to increase profits. As long as your margins stay roughly the same, higher sales mean higher profits. Margins may even widen as economies of scale kick in.

The downside is that growing revenue typically costs money. You'll need to buy more supplies, increase marketing, and possibly hire more staff.

Make sure you have the cash for these investments and that they pay back over time.

You can drive revenue in five main ways:

• Encourage repeat purchases: Get existing customers to buy more often
• Find new customers: Expand your customer base through marketing and outreach
• Expand your range: Add new products or services to increase sales opportunities
• Upsell: Offer higher-value options or add-ons to increase order size
• Raise prices: Charge more for your products or services to boost revenue per sale

Get more on these five strategies in our guide How to increase revenue.

Retain existing customers

Customer retention is one of the most cost-effective ways to increase profits. Acquiring a new customer can cost significantly more than keeping an existing one.

Here are ways to improve retention:

• Deliver excellent service: Satisfied customers come back and refer others
• Stay in regular contact: Email updates, check-ins, and helpful content keep you top of mind
• Act on feedback: Ask customers what they want and make improvements based on their input
• Reward loyalty: Offer discounts, early access, or exclusive perks for repeat customers
• Add value beyond the sale: Provide support, resources, or advice that helps customers succeed

Focus on your most profitable customers

Not all customers contribute equally to your profits. Some generate high margins with minimal effort, while others demand significant time and resources for modest returns.

Here's how to identify and prioritise your best customers:

• Analyse revenue versus cost to serve: Calculate what each customer or segment actually contributes after accounting for support, customisation, and other costs
• Segment your customer base: Group customers by profitability, industry, or behaviour patterns
• Direct marketing to high-value segments: Focus acquisition efforts on customers who match your most profitable profiles
• Review pricing for low-margin customers: Consider whether to raise prices, reduce service levels, or let unprofitable relationships go

Accounting software like Xero can help you track revenue by customer and spot patterns in your most profitable relationships.

Decreasing costs to increase profits

Reducing costs is another way to increase profits. When it works, this strategy keeps more money in the business with less upfront financial risk than revenue-growing strategies.

The tricky part is finding the right balance. Cut too hard and you can hurt revenue, since businesses generally need to spend money to make money. The goal is to trim expenses without compromising speed or quality.

How to increase gross profit

Gross profit is what's left after subtracting direct costs from revenue. You can increase it by raising revenue, cutting costs, or both. The key is to widen the gap between what you earn and what you spend on production, which improves your gross profit margins.

Common ways to improve gross profit margins

Here are practical tactics to widen your gross profit margins.

Accurate pricing is essential for profit. You'll never generate a profit without covering your true costs first. This involves a deep understanding of what drives expenses. One study showed how a government lab could convert salaries and supplies into outputs, revealing that single research papers cost hundreds of thousands of dollars to produce.

Here's how to get your pricing right:

• Count all costs: Include materials, labour, overhead, and hidden expenses
• Review past projects: Compare budgeted costs against actual costs to spot patterns
• Add contingencies: Build in a percentage buffer for unexpected costs or estimating errors
• Update regularly: Review your pricing as supplier costs and market conditions change

Consider these pricing approaches:

• Use value-based pricing to charge what customers are willing to pay, not just what it costs you to deliver. This aligns with a growing trend away from hourly billing. One survey noted a declining use of hourly pricing and an increase in value-based models.
• Review your prices regularly to keep up with rising costs and market changes
• Communicate price increases clearly and confidently, focusing on the value you provide

Scope creep happens when clients request extra work after a project starts, or when you take on tasks they were supposed to handle. Both scenarios eat into your margins.

Your contingency budget may cover small extras. For larger additions, issue a change order before doing the work. A change order is an on-the-run quote for extra work requested.

Don't wait until the project ends to bill for extras. Surprise invoices rarely end well.

Inventory costs can quietly erode your margins if you don't review them regularly.

Here are ways to reduce what you pay:

• Compare suppliers: Shop around periodically to check you're getting competitive rates
• Ask about bulk deals: Volume discounts can significantly lower per-unit costs
• Negotiate with current suppliers: Existing relationships often provide leverage for better terms
• Review stock levels: Avoid tying up cash in slow-moving inventory

Third-party service costs can catch you off guard if you're not paying attention. When contractors or vendors raise their prices, you're left to absorb the difference.

Stay ahead of cost increases by:

• Reading every invoice: Check line items for price changes
• Scheduling regular reviews: Compare current rates against your original agreements
• Building price adjustments into contracts: Include clauses that require advance notice of increases

Payroll is a major expense for most small businesses, which collectively account for 60–70% of the employment base in developed economies. The goal is to maximise what your team produces for every dollar you spend on wages.

Here's how to improve the balance:

• Remove low-value tasks: Keep people focused on work that matches their skills
• Use better systems: Software and tools can automate repetitive tasks
• Plan workflows carefully: Avoid relying on overtime, casual staff, or last-minute contractors
• Watch for burnout: Overworked staff are less productive and more likely to leave

Efficient workflows reduce wasted time and resources. Many business processes develop organically over time, which often leads to hidden inefficiencies.

Walk through your operations and look for:

• Unnecessary steps: Tasks that don't add value to the final product or service
• Double handling: Work that gets done more than once
• Bottlenecks: Points where people wait for approvals, materials, or information
• Out-of-sequence tasks: Jobs done in the wrong order, causing rework

Shipping costs can erode margins quickly, especially for businesses that started selling online. Courier fees may not have been part of your original pricing formula.

Work out the true cost of delivering each product and adjust your prices accordingly. Consider whether to absorb shipping costs, pass them to customers, or offer free shipping above a certain order value.

Merchant service fees are the transaction costs you pay when accepting card or online payments. These typically range from 2% to 4% of each sale, which can significantly reduce your margins.

Make sure you account for these fees in your pricing. You can also compare payment providers to find lower rates, or encourage payment methods with lower fees where appropriate.

How to increase net profit

Net profit is what remains after paying all business costs, not just direct production costs. To increase net profit, focus on your indirect costs, sometimes called sales, general, and administration expenses.

These include rent, utilities, marketing, professional services, and other overheads that aren't tied directly to producing your goods or services. Anything you do to improve gross profit will also help net profit.

Common ways to improve net profit margins

Here are practical ways to control overhead and boost your net profit.

Sales and marketing is a major expense, so make sure your spending delivers results.

Here's how to manage it effectively:

• Calculate customer acquisition cost: Work out what you spend to win each new customer
• Compare channel performance: Identify which strategies deliver the best return on investment
• Scrutinise big-budget tactics: High-cost campaigns need to justify their expense
• Activate free channels: Word of mouth and referrals cost nothing but can drive significant sales

Discretionary spending on travel, entertainment, and events can become a habit that outlives its value. Review these costs through the lens of return on investment.

Ask yourself:

• Does this expense still deliver measurable results?
• Could a lower-cost alternative achieve the same goal?
• Is this spending driven by habit rather than strategy?

Interest payments eat into profits, especially when rates rise or when you rely on short-term finance to cover cash gaps.

Ask an accountant or bookkeeper to review your lending. They can often consolidate multiple loans into lower-interest deals, reducing your monthly payments. You can find a financial advisor in Xero's advisor directory.

Rent and utilities often surprise businesses expanding from home-based setups. A dedicated space costs significantly more than a garage workshop or kitchen-table consultancy.

Consider lower-cost alternatives:

• Shared office spaces: Split costs with other businesses
• Remote working: Reduce the space you need by having staff work from home
• Pop-up locations: Use temporary spaces instead of permanent leases
• Energy efficiency: Reduce utility bills through smart usage

Payroll can be an indirect cost (relevant to net profit) or direct cost (relevant to gross profit). See How to increase gross profit for payroll strategies.

Supply chain costs including freight and warehousing can grow quickly if you have a distributed network or large inventory.

Here are ways to improve efficiency:

• Use local suppliers: Reduce shipping distances and lead times
• Tighten inventory management: Avoid holding excess stock that ties up cash
• Understand your true logistics costs: Factor freight and storage into your pricing
• Review carrier contracts: Compare rates and negotiate better terms

Professional service fees for legal, accounting, and recruitment add up quickly. These services are often essential, and research shows that 86% of small and medium accounting practices provide some form of advisory or consulting service. Manage costs by choosing the right providers.

Look for professionals who:

• Specialise in your business size or industry: They understand your needs and offer tailored advice
• Use compatible software: This reduces friction and saves time on both sides
• Offer flat-fee pricing: Predictable costs make budgeting easier than hourly billing

Tax planning can legally reduce your tax bill by structuring payments, timing expenses, and managing your accounts strategically.

Plan ahead. Work with an accountant at the start of the financial year, not the end. They can help you set up structures that minimise tax while staying compliant.

Find an accountant in Xero's advisor directory.

Track and improve profitability with Xero

Tracking your profitability is essential for making informed decisions about your business. When you can see your margins clearly, you know which strategies are working and where to focus next.

Xero helps you stay on top of your numbers with:

• Real-time reporting: See your profit margins and cash flow as they change
• Expense tracking: Categorise costs to identify savings opportunities
• Bank integration: Connect your accounts for accurate, up-to-date data
• Advisor network: Find accountants and bookkeepers who specialise in small business

Combine these insights with advice from experts, mentors, or industry peers to build a profit strategy that lasts.

Ready to take control of your profitability? Get one month free and see how Xero can help your business grow.

FAQs on increasing profits

Here are answers to common questions about improving business profitability.

What's the difference between increasing profits and increasing revenue?

Revenue is the total money your business earns from sales. Profit is what's left after you subtract all your costs. You can increase revenue without increasing profit if your costs rise at the same rate, or faster.

Which profit improvement strategy should I start with?

Start by reviewing your pricing and auditing your costs. These often reveal quick wins. For longer-term gains, focus on customer retention and operational efficiency. Use your financial reports to identify where your biggest opportunities lie.

How long does it take to see results from profit improvement strategies?

Some changes show immediate results. Pricing adjustments and cost cuts can improve your next month's numbers. Customer retention and workflow improvements typically take three to six months to show measurable impact.

How do I know if my profit margins are healthy?

Healthy margins vary by industry. Service businesses often achieve gross margins of 50% to 70%, while retail and product businesses typically see 25% to 50%. Small businesses generally consider net margins of 10% to 20% healthy. Compare your margins to industry benchmarks and track trends over time.

Can I increase profits without raising prices?

Yes. You can reduce costs, improve operational efficiency, retain more customers, and focus on higher-margin products or services. That said, many businesses are underpriced. Regular price reviews help ensure you're covering your true costs and capturing fair value.