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To increase profitability, businesses must either reduce expenses or increase revenue, or find a combination of both. Variable costs, such as the workforce, can be cut to reduce expenses, but this may impact productivity. Increasing revenue while keeping expenses at a slower level is the most desirable option, but it can be difficult to strike a balance between prices customers are willing to pay and profitability. The airline industry has found ways to increase revenue, but there are risks involved.
There are many suggestions that can be made when it comes to ways to increase profitability. However, despite all the formulas and all the tips, the ways to increase profitability boil down to two things. Either business administrators need to find a way to reduce expenses or increase revenue, or find a combination that accomplishes both.
For most companies, whenever they find themselves in tough economic times, the first trend is to cut expenses to increase profitability. This is a natural inclination as there seem to be some expenses that can always be cut. However, there are others that cannot be. In economics, these are known as fixed costs and variable costs. Variable costs are the ones that can be cut more easily.
There are several ways to reduce variable costs. However, it should be emphasized that the largest variable cost for the vast majority of businesses is the workforce. Thus, even for moderately severe situations, a certain number of layoffs, or at least reduced hours worked, will likely be required to have a significant impact in reducing expenses.
While layoffs and reduced hours may be a popular way to reduce expenses and, as a result, increase profitability, there is some risk to this strategy. First, others will have to find ways to compensate for this lack of help. While that adjustment takes place, it may be nearly impossible to increase profitability because productivity will suffer.
The most desirable, but also most difficult, option to increase profitability is to increase revenue while keeping expenses at a slower level than increasing revenue. There are many ways to do this, depending on the type of business you run. Companies that manufacture a product can add new product lines or raise prices. Service companies can add services, charge premiums for some things, or raise prices.
For example, the airline industry is a master at finding ways to increase profitability or, at least in some cases, at least reduce the size of the loss. From charging for baggage, to charging for onboard refreshments, the industry has found ways to increase revenue by looking at potential flows that have never been tapped before. However, accomplices in such actions are certain risks.
Customers often object to higher prices and may decide to take their business elsewhere. The key for many businesses is to strike a balance between the prices customers are willing to pay and a price that allows the business to increase profitability. Of course, the law of supply and demand will usually ensure market equilibrium. However, a significant amount of financial hardship could ensue before this balance is achieved.
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