Why Margins Matter More Than You Think

Many business owners believe the key to profitability lies in selling more. But focusing solely on sales without understanding profitability often leads to a frustrating cycle – working harder but never quite feeling in control of your finances.

The thing is – profitability needs to come first. Each product you sell should contribute to your business’s overall health. When every product is priced and structured for profitability, growth becomes sustainable, and you can invest in your business and yourself.

In this article, I’ll talk about how small adjustments using a data driven approach can have a significant impact on your profit margins. I’ll also share a real world example and a practical tool to help you get started.

What You Need to Know About Improving Margins

Profit margins are impacted by a variety of factors that are often ignored by business owners. The obvious one is, of course, product pricing. Simply putting up your prices will increase your margins. I’ll be writing an article about this later in the year. For now, just bear in mind that increasing your prices may affect your sales volumes i.e. you might sell less. But elements like excise taxes, bottle sizes, product offerings, and production costs can all affect your bottom line, too.

The good thing is that small adjustments to these areas can make a significant difference. By fine tuning your margins, you can create savings that improve profitability across your entire business.

Strong margins aren’t just about today – they give you the resources to reinvest, grow, and handle unexpected costs in the future.

To help you identify where adjustments could benefit your business, I’ve created a profit margin spreadsheet. This tool makes it simple to analyse key factors and see how small changes can lead to big results.

To understand the margins of your products, you need to know exactly what it costs you to make each product. Unless you have one product only, you won’t be able to find this in your accounting system because all this information is lumped together.

If you don’t know your cost of goods, you either need a spreadsheet with individual product costings that you update frequently or you’ll need to consider specialised inventory management software. There are options for all different levels of business. For more information have a look at my article here.

Adopting a Data Driven Approach

Relying on intuition to make business decisions will leave you guessing about what’s really driving your profits. A data driven approach gives you clarity by showing you exactly which products are contributing to your bottom line and which ones are holding you back.

When you have accurate data, you can make informed decisions about pricing, product offerings, and production strategies. This isn’t just about knowing your numbers – it’s about using them to take the guesswork out of improving your margins.

Your profit margins hold the key to identifying opportunities for improvement. With the right tools, like a profit margin spreadsheet or inventory management software, you can analyse your costs and uncover areas where small adjustments could lead to significant gains.

Reviewing and Refining Your Product Offering

Not all products are created equal when it comes to profitability. Regularly reviewing your product range helps you identify which items contribute the most to your bottom line and which might be eating up resources.
Low margin products can drain your time and money, especially if they require just as much effort to produce as high margin items. By streamlining your offerings or discontinuing less profitable products, you can focus on what actually drives profitability in your business.

Sales data is your best friend here. Analysing it will show you which products generate the highest returns, helping you make strategic decisions about where to focus your efforts.

Buying in Bulk to Reduce Costs

Purchasing materials like bottles, labels, and packaging in bulk is a simple but effective way to reduce costs. Bulk buying not only lowers the per-unit price but also ensures consistency in your branding and supply.

Start by identifying which items you use frequently and in large quantities. These are the best candidates for bulk purchasing. Once you know what you need, approach suppliers to negotiate better rates – many are open to discounts for larger orders or ongoing commitments.

Taking a strategic approach to bulk buying can significantly improve your margins while keeping your production steady and reliable.

Standardising Bottle Sizes

Inconsistent bottle sizes can add hidden costs to your business. Larger bottles or too many different SKUs often mean higher production and storage costs, as well as increased complexity in managing inventory.

By standardising bottle sizes or shapes across your product range, you simplify operations and reduce expenses. For example, using fewer SKUs means you need fewer carton styles, can manage dry goods more efficiently, and hold inventory for less time.

For breweries, this could mean shifting from 500ml bottles to 330ml bottles – but keep in mind any equipment adjustments required. For distilleries, consider standardising bottle sizes like 500ml or 750ml. Wineries can also benefit from streamlined bottle shapes and sizes, which help balance costs while maintaining a consistent brand presence.

Standardisation doesn’t just save money – it makes it easier to manage customer expectations and create a cohesive product range.

Adjust Alcohol Percentage and Manage Excise Taxes

Alcohol percentage can play a significant role in the excise tax your business pays, but adjusting it requires careful consideration. For distilleries and breweries, even a small change in alcohol content can impact flavour and customer expectations, which is why this strategy should be approached with care.

If we look at both the UK and Australia, excise tax is directly tied to alcohol percentage. For example, if you produce a gin at 40% alcohol and reduce it to 39%, you can lower your excise tax by 2.5%.

Using the profit margin spreadsheet, you can calculate what effect adjustments to alcohol percentage will have on your pricing and profitability.

Real World Example: Reducing the Cost of Goods on a Case of Wine by 5%

A few years back, I was working with a client. We had a clear goal: reduce the cost of goods on a case of wine by 5%. By focusing on small, strategic changes, we were able to achieve this target and improve the client’s overall margins. There was no easy to find big ticket item, but 10 or 12 small changes that contributed between 0.2% and 0.6% each.

Some of the strategies we implemented included:

• Purchasing bottles and labels in bulk to lower unit costs
• Reducing waste across production processes
• Decreasing the frequency of bottling, which significantly cut transport costs
• Standardising carton colours and quality for consistency and cost savings
• Using the same bottle size across all products to simplify inventory management

This project demonstrates how small, targeted adjustments can lead to significant savings. If you’re not sure where to start or how to identify similar opportunities, book a call with me, Ian Senior, for expert guidance that’s tailored to your business.

Final Thoughts

As a producer, understanding your profit margins and cost of goods is essential. When you have clarity on these numbers, it becomes much easier to identify where small adjustments can have the greatest benefit.

That said, even if you’re not completely clear on your margins yet, there are still adjustments you can make to improve profitability. Small changes in areas like bottle shapes/sizes and purchasing strategies can create a significant impact when implemented thoughtfully.

Next Steps

Take the first step toward improving your profitability:

• Download the Profit Margin Spreadsheet: Use this free tool to start analysing your margins and identifying opportunities for improvement.
• Book a Consultation: If you’d like expert help with strategies to increase your profitability, reach out to schedule a consultation.