How to increase profits by growing revenue and margins

Published Thursday 2 April 2026

Table of contents

• Profitability factors
• Choose your profit-improvement strategy
• Increasing revenue to increase profits
• Identify your most profitable customers, products, and services
• Retain and reward existing customers
• Decreasing costs to increase profits
• How to increase gross profit
• How to increase net profit
• Track and improve your profitability with Xero
• FAQs on increasing profits

Key takeaways

• Focus on your most profitable customers and products by applying the 80/20 rule, where roughly 80% of your profit comes from just 20% of your customers or products, then direct your marketing and resources toward these high-margin areas.
• Prioritise customer retention over acquisition since keeping existing customers costs 3 to 25 times less than finding new ones, and existing customers convert at 60-70% compared to just 5-20% for new prospects.
• Improve your gross profit margin by accurately pricing your products or services to cover all direct costs plus a buffer, regularly reviewing supplier costs, and managing scope creep through formal change orders during projects.
• Reduce overhead costs to boost net profit by tracking your marketing return on investment, restructuring high-interest debt, choosing cost-effective office arrangements, and working with an accountant early in the financial year for tax planning.

Profitability factors

Profitability factors are the elements that determine how much money your business keeps after expenses. The main factors are your revenue, your costs, and the margin between them.

• Revenue: the total money coming into your business from sales
• Costs: the expenses you pay to run your business and deliver products or services
• Gross profit: the money left after subtracting direct costs (cost of goods sold) from revenue
• Net profit: the money left after subtracting all business costs, including taxes

Choose your profit-improvement strategy

There are four main ways to increase profits. Each suits different situations:

• Increase revenue: grow sales through new customers, higher prices, or expanded offerings
• Reduce costs: cut expenses without hurting quality or operations
• Improve gross profit margin: optimise direct costs like materials, labour, and delivery
• Improve net profit margin: reduce overhead costs like rent, marketing, and administration

Most businesses benefit from a combination. Start with the approach that offers the quickest wins for your situation, then build from there.

Increasing revenue to increase profits

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

The trade-off is that growth typically requires investment. You may need to spend on supplies, marketing, tools, and staff. Make sure any investment pays back over time.

You can drive revenue in five main ways:

• Increase purchase frequency: encourage existing customers to buy more often
• Acquire new customers: expand your customer base through marketing and outreach
• Expand your range: add new products or services to capture more sales
• Upsell and cross-sell: offer upgrades or complementary items at point of sale
• Raise prices: adjust pricing to reflect the value you deliver

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

Identify your most profitable customers, products, and services

Not all revenue is equal. Some customers, products, and services deliver higher margins than others. Research suggests that applying the Pareto principle shows around 80 per cent of your profit comes from just 20 per cent of your customers or products. When you focus on your most profitable areas, you can boost overall profits without increasing sales volume.

To identify your best performers:

• Analyse revenue by customer: Which customers generate the most profit after accounting for service costs?
• Review product margins: Which products or services have the highest gross margin?
• Assess time and effort: Some sales require more support, returns, or follow-up, which reduces true profitability.

Once you know where your best margins come from, you can focus marketing, sales, and resources on those areas.

Retain and reward existing customers

You spend significantly more to acquire a new customer than to keep an existing one; a 2023 analysis found acquiring a new customer costs 3x to 25x more than retaining a current one, depending on the industry. When you improve retention, you directly increase profits by reducing marketing spend and increasing lifetime value.

Strategies to retain customers:

• Deliver consistent quality: meet expectations every time to build trust
• Stay in touch: regular communication keeps your business top of mind
• Reward loyalty: offer discounts, early access, or exclusive perks for repeat customers
• Ask for feedback: when you understand what customers value, you can improve and show you care

A small improvement in retention can have a large impact on profit over time, particularly since existing customers convert at 60–70%, while new prospects convert at a much lower rate of 5–20%.

Decreasing costs to increase profits

When you decrease costs, you keep more money in your business by reducing what flows out. This approach carries less upfront financial risk than revenue-focused strategies because you're cutting expenses rather than investing in growth.

The challenge is to find the right balance. Cutting too deeply can hurt revenue and quality. Focus on trimming expenses that don't affect the speed or quality of your operations.

How to increase gross profit

Gross profit is the money left after subtracting direct costs from revenue. You can increase it by raising revenue, lowering direct costs, or both. The goal is to widen your gross profit margin, which is the percentage of revenue you keep after covering direct costs.

Here are practical strategies to widen your gross profit margin.

Common ways to improve gross profit margins

Nail your estimating, quoting, and pricing

Accurate pricing is the foundation of profit. Cover your true costs to generate a margin.

To improve your estimates:

• Track actual vs budgeted costs: review completed projects to spot where estimates fell short
• Add contingencies: include a percentage buffer to cover unexpected expenses or estimating errors
• Refine over time: use each project as a learning opportunity to sharpen future quotes

Keep an eye on scope creep

Extra work requests during a project can eat into your margin. Contingencies may cover small additions, but larger changes need a formal response.

Issue change orders for significant extra work while the project is still in progress. A change order is a quote for the additional scope. Present change orders while the project is in progress.

Review your inventory costs

Supplier costs directly affect your gross margin. Regularly check that you're getting competitive pricing.

• Compare suppliers: shop around periodically to benchmark your current rates
• Ask about bulk discounts: larger orders may unlock better pricing
• Negotiate with existing suppliers: use competitor quotes as leverage for better terms

Monitor third-party service costs

Contractors and service providers may raise prices without notice. Catch price increases early to protect your margin.

Review purchase invoices regularly and flag any rate changes before they affect your profitability.

Balance payroll and productivity

Payroll is often the largest expense for small businesses. For example, the National Restaurant Association reports that profitable full-service restaurants keep labour at 34.2% of sales, while for unprofitable ones it can be as high as 42.9%. Manage it well to get the most value from every hour worked.

• Remove low-value tasks: free your team to focus on work that drives revenue
• Use better systems and tools: automation and software reduce manual effort
• Manage workflows proactively: avoid relying on overtime, casual staff, or last-minute contractors, which add cost and increase burnout risk

Design the most efficient workflow you can

Workflows that develop organically are often inefficient. Review your processes to reveal easy wins.

Look for these common problems:

• Waiting: staff idle while waiting on approvals, materials, or information
• Sequencing errors: tasks done out of order, causing rework
• Duplication: the same work done twice by different people
• Wasted resources: materials, time, or effort spent on unnecessary steps

Properly account for shipping

Build freight costs into your pricing to protect your margins. This is especially common for businesses that have recently started selling online.

Calculate your true delivery costs per order and adjust your pricing or shipping fees accordingly.

Merchant service fees

Merchant service fees (also called transaction fees) are charges for accepting card or online payments. These typically range from 2% to 4% of each sale.

Factor these fees into your pricing to protect your margin. Compare payment providers to find better rates and protect your profits.

How to increase net profit

Net profit is the money left after subtracting all business costs from revenue, including indirect expenses like rent, utilities, marketing, and administration. Improving net profit means managing these overhead costs alongside the direct costs covered in gross profit.

To widen your net profit margin, focus on reducing indirect costs while maintaining your ability to operate and grow.

Here are strategies to reduce overhead costs and improve your net profit margin.

Common ways to improve net profit margins

Measure and manage your sales and marketing

Marketing spend can grow quickly, so track results to ensure proportional returns. Track your return on investment to keep spending efficient.

• Calculate customer acquisition cost: divide marketing spend by new customers gained to benchmark each channel
• Prioritise high-return tactics: focus budget on strategies that deliver measurable sales
• Activate free channels: word of mouth and referrals cost nothing but can drive significant growth

Reassess travel, entertainment, and discretionary spending

Recurring expenses like annual trade shows or client entertainment can become habits rather than strategic choices. Review each discretionary cost through the lens of return on investment.

Cut or reduce spending that no longer delivers measurable value.

Restructure your lending

Interest payments reduce net profit, especially when rates rise or you rely on short-term finance to cover cash gaps.

Ask an accountant or bookkeeper to review your debt. Consolidating loans into lower-interest options can reduce ongoing costs. Find an adviser in Xero's adviser directory.

Be resourceful with rent and utilities

Fixed premises costs can rise sharply when you move from a home-based setup to dedicated space. Review whether your current arrangement delivers value for money.

Consider lower-cost alternatives:

• Shared office spaces: pay only for the space you use
• Pop-up shops: test locations without long-term leases
• Remote working: reduce office footprint by supporting flexible work
• Energy efficiency: lower utility bills through smarter usage

Balance payroll and productivity

Payroll can be an indirect cost (relevant to net profit) or direct cost (relevant to gross profit). This guide deals with it under How to increase gross profit.

Strive for supply chain efficiencies

Freight and warehousing costs grow with inventory size and supply chain complexity. Understand these costs to price accurately and find savings.

• Use local suppliers: shorter distances reduce freight costs and lead times
• Tighten inventory management: carry less stock to reduce warehousing expenses
• Factor logistics into pricing: make sure delivery costs are covered in your margins

Pick your professional services wisely

Legal, accounting, and recruitment fees add up quickly. While these services are essential, choosing the right provider can reduce costs.

• Choose specialists in your size or industry: they understand your needs and often charge less
• Choose providers with compatible software: seamless integration saves time and reduces errors
• Choose providers with flat-fee pricing: predictable costs make budgeting easier

Get into tax planning

How you structure payments, schedule spending, and manage accounting affects your tax bill. Good tax planning can reduce what you owe.

Work with an accountant at the start of the financial year to set up tax-efficient structures. If you wait until year-end, you limit your options. Find an accountant in Xero's adviser directory.

Track and improve your profitability with Xero

To improve how profitable your business is, you need to see your numbers clearly. When you can see your margins clearly, you can make confident decisions about pricing, costs, and growth.

Xero's accounting software gives you real-time insights into your financial performance. Customisable reports help you track gross and net profit margins, monitor expenses, and spot opportunities to improve.

Set clear profitability goals, measure your progress, and adjust your strategy as you learn what works. Start tracking your profitability today and try Xero free.

FAQs on increasing profits

Here are answers to common questions about improving small business profitability.

How quickly will I see results from profit-improvement strategies?

Results depend on the strategy. Cost reductions often show impact within weeks, while revenue-focused changes may take months to build momentum.

Should I focus on increasing revenue or reducing costs first?

Start where you have the most control and quickest wins. Cost reductions typically carry less risk, but revenue growth offers more long-term upside.

What's a healthy profit margin for a small business?

Healthy margins vary by industry. As a general guide, a good net profit margin for a small business typically ranges from 5–10%, though some consider 10% to 20% to be strong.

How can accounting software help me increase profits?

Accounting software gives you real-time visibility into revenue, costs, and margins. This helps you spot problems early and measure the impact of changes.

Can I increase profits without raising prices?

Yes. You can improve profits by reducing costs, increasing purchase frequency, upselling, improving efficiency, or focusing on higher-margin products and customers.