Increase profits with smarter pricing and cost control

Published Thursday 2 April 2026

Table of contents

• Profitability factors
• Increasing revenue to increase profits
• Decreasing costs to increase profits
• Focus on your most profitable customers
• How to increase gross profit
• How to increase net profit
• Track and improve your profitability
• FAQs on increasing profits

Key takeaways

• Focus on your most profitable customers by analysing sales data to identify which clients generate the highest margins, then invest in loyalty rewards and priority service for these customers while addressing unprofitable relationships through price increases or service reductions.
• Improve gross profit margins by accurately pricing all costs including materials, labour and overhead, protecting against scope creep with change orders, and regularly reviewing supplier costs to negotiate better rates or find alternatives.
• Reduce indirect costs to boost net profit by measuring marketing return on investment, reassessing discretionary spending like travel and entertainment, and optimising professional service fees by choosing specialists who use efficient pricing models.
• Track profitability continuously by monitoring key metrics like gross margin and net margin monthly, setting clear profit targets, and using accounting software to identify which strategies improve margins so you can focus resources on high-value activities.

Profitability factors

Profitability factors are the key drivers that determine how much money your business keeps after expenses. The main factors are:

• Revenue: the total money coming into your business from sales
• Costs: the expenses you pay to run your business
• Margins: the gap between revenue and costs

Understanding these factors helps you identify where to focus your profit improvement efforts. Here's how each one breaks down:

• Revenue: the total sales income available to generate profit
• Costs: the expenses that reduce your available profit
• Gross profit: the money remaining after paying direct costs tied to your products or services, known as the cost of goods sold
• Net profit: the money remaining after paying all business costs, including taxes

Increasing revenue to increase profits

Increasing revenue boosts profits by expanding the pool of money available after costs. When margins stay stable, higher sales mean higher profits. Economies of scale can even widen your margins as you grow.

Revenue growth does require investment. You may need to:

• buy more supplies and inventory
• increase your marketing spend
• purchase additional tools or equipment
• hire more employees

Make sure these investments pay back over time to protect your profit gains. Strategic spending supports revenue growth.

You can drive revenue in five main ways:

• Encourage repeat purchases: increase order frequency from existing customers who already trust you, a strategy that yields five to 25 times more profit than acquiring new customers.
• Find new customers: expand your customer base to grow total sales volume
• Expand your offerings: add products or services that complement what you already sell. According to McKinsey research, these cross-selling techniques can boost revenue by 20% and increase profits by 30%.
• Upsell: offer premium options or add-ons to increase average transaction value
• Raise prices: charge more for your products or services to improve revenue per sale

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

Decreasing costs to increase profits

Decreasing costs increases profits by keeping more money in your business. This approach carries less upfront financial risk than revenue growth strategies because you're reducing outflows rather than investing in expansion.

Balance is essential: maintain spending that supports your revenue while trimming inefficiencies.

Focus on trimming expenses without compromising the speed or quality of your operations. The goal is efficiency, not just reduction.

Focus on your most profitable customers

Customers contribute differently to your profits. Some generate strong margins, while others cost more to serve than they're worth. Identifying your most profitable customers helps you focus your time and resources where they deliver the best returns. For example, one brand used customer segmentation to achieve a $1.1M increase in incremental revenue.

Several factors explain why customer profitability varies:

• Order size: larger orders spread your fixed costs across more revenue
• Service demands: some customers require more support, returns, or customisation
• Payment behaviour: late payers tie up your cash and create admin work
• Pricing sensitivity: customers who always push for discounts reduce your margins

You can take several steps to focus on your most profitable customers:

• Analyse your sales data: identify which customers generate the highest margins, not just the highest revenue
• Segment your customer base: group customers by profitability to guide your sales and marketing efforts, especially since research shows that 91% of consumers are more likely to buy from brands that offer relevant deals and recommendations.
• Invest in your best customers: offer loyalty rewards, priority service, or exclusive products
• Address unprofitable relationships: raise prices, reduce service levels, or let low-margin customers go

Accounting software helps you track profitability by customer, so you can make informed decisions about where to focus.

How to increase gross profit

Gross profit is the money left after paying the direct costs of providing your products or services. While this varies by industry, the average gross profit margin across all sectors is about 36.56%.

The key metric to watch is your gross profit margin, which measures the gap between what you earn and what you spend on production or service delivery.

Common ways to improve gross profit margins

Protect and grow your gross margins with these practical steps.

Nail your estimating, quoting, and pricing

Accurate pricing is the foundation of profitability. You can't generate profit without covering your true costs first.

Improve your estimating with these approaches:

• Count all costs: include materials, labour, overhead, and time
• Review completed projects: compare budgeted costs against actual costs to spot mistakes
• Add contingencies: build in a percentage buffer for unexpected expenses or estimating errors
• Refine over time: use past project data to improve future estimates

Keep an eye on scope creep

Scope creep happens when clients request extra work after a project starts, or when you take on tasks they were supposed to handle. These additions eat into your margins if you don't account for them.

Protect your profits from scope creep with these strategies:

• Use your contingency: absorb small extras within your built-in buffer
• Issue change orders: for larger additions, quote the extra work before you do it
• Act quickly: raise change orders while the project is in flight, not at the end
• Communicate clearly: surprising clients with a bigger final bill rarely ends well

Review your inventory costs

Supplier costs directly affect your gross margins. Regular reviews help you find savings.

Reduce inventory costs with these approaches:

• Compare suppliers: shop around periodically to check you're getting competitive rates
• Negotiate bulk deals: ask existing suppliers about volume discounts
• Renegotiate terms: use competitor quotes as leverage with your current suppliers
• Review regularly: set a schedule to reassess supplier costs at least annually

Monitor third-party service costs

Contractors and service providers can raise prices without warning. If you don't notice, you absorb the cost.

Stay on top of third-party expenses with these practices:

• Review invoices carefully: check each bill against agreed rates
• Set price alerts: flag any increases for immediate review
• Renegotiate or switch: if costs rise, explore alternatives or negotiate better terms
• Build price reviews into contracts: include clauses that require advance notice of rate changes

Balance payroll and productivity

Payroll is one of the largest expenses for most small businesses. Managing it well protects your margins.

Optimise payroll costs with these strategies:

• Focus on strengths: keep employees working on tasks they do best
• Eliminate time-wasters: remove trivial or repetitive tasks that reduce productivity
• Invest in tools: use software and systems to automate routine work
• Plan workflows: reduce reliance on casual staff, contractors, and overtime, which all carry premium costs
• Prevent burnout: overworked staff become less productive over time

Design the most efficient workflow you can

Many business processes develop over time without deliberate planning. This often creates hidden inefficiencies that drain profits.

Review your workflows systematically to identify inefficiencies. Walk through each process and look for:

• Waiting time: staff idle while waiting for approvals, materials, or information
• Out-of-sequence work: tasks done in the wrong order, causing rework
• Duplication: the same job done twice by different people
• Unnecessary steps: processes that add time without adding value
• Wasted resources: materials, energy, or supplies used inefficiently

Fixing these issues improves productivity without increasing costs.

Properly account for shipping

Shipping costs can erode margins quickly, especially for businesses new to online sales. Courier fees may not have been part of your original pricing.

Protect your margins from shipping costs with these steps:

• Calculate true delivery costs: include packaging, handling time, and carrier fees
• Adjust your pricing: build shipping costs into product prices or charge separately
• Compare carriers: shop around for better rates as your volume grows
• Offer thresholds: encourage larger orders with free shipping above a certain amount

Merchant service fees

Transaction fees for accepting card and online payments typically range from 2% to 4% of each sale. These fees can significantly reduce your margins if not accounted for.

Manage transaction costs effectively with these approaches:

• Factor fees into pricing: include payment processing costs in your pricing formula
• Compare providers: shop around for lower-cost payment processors
• Consider payment incentives: some businesses offer small discounts for bank transfers or cash
• Review statements: check your merchant fees regularly for unexpected increases

How to increase net profit

Net profit is the money remaining after paying all business costs, including indirect expenses like rent, marketing, and administration. Across all industries, the average net profit margin is 8.54%.

Improving your gross profit margins will help your net profit too. But to go further, you need to focus on indirect costs, sometimes called sales, general, and administration (SG&A) expenses.

These include all the costs indirectly tied to producing your products or delivering your services.

Common ways to improve net profit margins

Here are practical ways to reduce indirect costs and widen your net profit margin.

Measure and manage your sales and marketing

Marketing can be a major expense. Make sure your spending delivers actual sales, not just activity.

Improve your marketing ROI with these strategies:

• Calculate customer acquisition cost: work out what you spend to gain each new customer
• Compare channel performance: identify which strategies deliver the best returns
• Scrutinise big-budget tactics: high-cost campaigns need to prove their value
• Activate free channels: word of mouth and referrals cost nothing but can drive significant sales
• Reallocate budget: redirect spending from low-return activities to high-return ones

Reassess travel, entertainment, and discretionary spending

Habitual spending can drain profits without delivering value. Review discretionary expenses through an ROI lens.

Ask yourself these questions when reviewing discretionary spending:

• Does this tradeshow generate leads? Base attendance decisions on measurable lead generation
• Are client entertainment costs justified? Track whether spending translates to business
• Can we achieve the same result for less? Virtual meetings may replace some travel
• What legacy costs can we cut? Subscriptions, memberships, and recurring fees add up

Restructure your lending

Interest payments reduce your net profit, especially when rates rise. Relying on short-term finance to cover cash gaps makes this worse.

Reduce interest costs with these approaches:

• Review your debt structure: identify high-interest loans or credit facilities
• Consolidate where possible: combine multiple loans into a single lower-interest deal
• Refinance when rates drop: lock in better terms when market conditions improve
• Get professional advice: an accountant or bookkeeper can help optimise your debt

Find a financial advisor in Xero's advisor directory.

Be resourceful with rent and utilities

Moving from a home-based setup to dedicated premises significantly increases costs. Make sure your pricing accounts for this, and explore ways to reduce overheads.

Consider these lower-cost alternatives to reduce overheads:

• Shared office spaces: split costs with other businesses
• Pop-up shops: test locations without long-term lease commitments
• Remote working: reduce office space needs by supporting flexible work
• Energy efficiency: lower utility bills through smart usage and equipment upgrades
• Space utilisation: make sure you're using every square metre effectively

Balance payroll and productivity

Payroll can be an indirect cost (relevant to net profit) or direct cost (relevant to gross profit). See how to increase gross profit for more on managing payroll as a direct cost.

Strive for supply chain efficiencies

Freight and warehousing costs grow as your supply chain expands. Understanding these costs helps you price accurately and find savings.

Improve supply chain efficiency with these strategies:

• Calculate total logistics costs: include freight, storage, handling, and insurance
• Consider local suppliers: shorter distances mean lower shipping costs
• Tighten inventory management: reduce storage costs by holding less stock
• Factor logistics into pricing: make sure your prices cover the true cost of delivery
• Review regularly: supply chain costs change, so reassess at least annually

Pick your professional services wisely

Professional fees for legal, accounting, and recruitment services add up. While these services are essential, the right provider can save you money.

Get better value from professional services with these approaches:

• Find specialists: choose providers focused on businesses your size or in your industry
• Compare pricing models: flat fees help with budgeting better than hourly rates
• Check their tools: providers using modern software often work more efficiently
• Shop around periodically: regularly evaluate whether your current provider remains the best fit
• Bundle services: some providers offer discounts for multiple services

Get into tax planning

Smart tax planning can legally reduce your tax bill and improve net profit. The key is planning ahead, not reacting at year-end.

Several tax planning strategies can help reduce your tax bill:

• Timing purchases: schedule major expenses to maximise deductions in the right tax year
• Structuring payments: pay yourself and others in tax-efficient ways
• Claiming all deductions: claim all legitimate business expenses
• Reviewing your business structure: the right structure can reduce your overall tax burden

Work with an accountant at the start of the financial year to set things up correctly. Find an accountant in Xero's advisor directory.

Track and improve your profitability

Improving profit is an ongoing process that requires continuous attention. The businesses that succeed are those that measure their progress and adjust their approach over time.

Track your profitability effectively with these practices:

• Monitor key metrics: track gross margin, net margin, and profit trends regularly
• Set clear goals: define specific profit targets for the quarter or year
• Review performance: compare actual results against your goals each month
• Identify what's working: double down on strategies that improve margins
• Focus resources wisely: redirect effort from low-value activities to high-value ones

Accounting software gives you real-time visibility into your margins, costs, and revenue. Track your profit performance with customisable reports and automated insights in Xero. Get one month free and start improving your profitability today.

FAQs on increasing profits

Common questions about improving business profitability.

How long does it take to see profit improvements?

Most cost-cutting measures show results within one to three months. Revenue growth strategies typically take three to six months to deliver measurable profit improvements.

Which profit strategy should I focus on first?

Start with quick wins that require minimal investment, such as reviewing pricing, cutting unnecessary expenses, or improving invoicing speed. These build momentum and free up cash for larger initiatives.

How do I know if I'm cutting costs too much?

Watch for warning signs like declining product quality, slower service delivery, increased customer complaints, or rising staff turnover. Effective cost reduction improves efficiency without harming what customers value.

Can I increase profits without raising prices?

Yes. You can improve profits by reducing costs, increasing sales volume, upselling to existing customers, improving operational efficiency, or focusing on higher-margin products and services.

What tools help track and improve profits?

Accounting software like Xero provides real-time visibility into your revenue, costs, and margins. Use profit and loss reports, margin analysis, and cash flow forecasts to identify improvement opportunities and track progress.