How to Use Gross Profit Margin to Make Data-Driven Decisions for Your Business
Companies across all markets and sectors face a similar challenge. They all need to break down their profit margins into comprehensive data and use it to make informed decisions about the future of their business. It doesn’t get much more fundamental than that.
Without a clear understanding of gross profit margins and the data that these margins consist of, managing a sustainable business model is nearly impossible.
The world is becoming increasingly data-driven, making those quintessential ones and zeros more indispensable to business operations than ever before. By using gross profit margin data to drive business decisions, you can enhance productivity and maintain a position of competitive advantage.
What Makes Gross Profit Margin Such An Important Metric?
In simple terms, the gross profit margin is whatever profit that is left over once you’ve paid for the direct costs of running your business. It’s a crucial metric to track because it tells you how successfully your management cohort is generating revenue.
The higher your gross profit margin is, the more effective your profit-generating strategy is. It’s a clear indicator of your business’s health and level of future sustainability.
You can use gross profit margin to inform other aspects of business, too, such as:
- Management cohesion and productivity
- Customer satisfaction rate
- Monthly and annual cost upkeep
All in all, gross profit margin is an extremely important metric to follow if you’re running a business no matter what kind. And the best way to keep track of it is to utilize data-driven decision-making.
What Defines DDDM (Data Driven Decision Making)?
Data-driven decision-making (also known as DDDM) refers to the process of harvesting data from your business’s key performance indicators (KPIs) and transforming them into actionable insights. This allows you to take the raw data and turn it into more practical, usable information.
While making gut-based decisions is also important in a professional setting, data-driven decisions are the kind you can rely on to be consistent every time. When it comes to meeting goals and monitoring metrics, data-driven decision-making is the way to go.
DDDM is also the most useful way to go about tracking important metrics like gross profit margin. And without a way to track this crucial metric, other metrics become harder to monitor.
Why Is Data-Driven Decision Making So Important?
Data makes the modern world go round. We need it to break down large amounts of complex information into smaller, more comprehensible chunks that provide insight into market behavior and facilitate better productivity. Here are some other reasons why DDDM is so essential today:
- Drives up sales and gross profit margins
- Reinforces good management behavior
- Tightens team productivity and performance
- Optimizes internal operations
Knowledge is power, and data is knowledge. Therefore, the more streamlined your data-collecting system and analysis, the more efficient and informed your business. And the easier it is to make long-term decisions based on solid know-how.
How To Use DDDM For Improved Gross Profit Margin And More
There are many ways to utilize the power of DDDM.
Gaining a better understanding of gross profit margin will help you to manage your business in a more efficient and informed way. But how do you accomplish that? Here are several effective ways to use gross profit margins and DDDM to streamline business operations:
Establish your data sources
Before you can start using your data to inform business decisions, you need to know where it’s coming from and which sources you can rely on most.
Establishing your various data sources is an important step for making sense of raw data. Some of the most commonly recognized data sources include:
- Gross profit margin – This message bears repeating. Gross profit margin is one of the strongest indicators of your business’s health, so using it as a data source is very useful.
- Productivity – How productive is your team on an average basis? Finding out the pace, accuracy, and output level of your employees is another clear indicator of business health.
- Return on investment (ROI) – How much profit is your business making through new strategies and investments? Are they worth the money, or are they simply draining resources with no results? ROI is a strong gauge of productivity.
- The total number of customers – Is your customer demographic growing or shrinking over time? The total amount of customers your business has is an essential data source.
Establishing your data sources will help you determine which ones to focus on, both now and in the future. Select the avenues most relevant to your business and use what you find through them to inform your decisions moving forward.
Organize your data-tracking system
Data collection and tracking needs to be an organized affair. You will need tools and software programs to not only make sense of them but also to prevent confusion.
Fortunately, there are plenty of high-grade data-tracking platforms, tools, and devices you can use to organize your approach to data-tracking, most of which you can readily find online.
These tools are designed to not only organize your data but also to store it in a secure location and provide you with a wide variety of automation tools that make data analysis easy and efficient. These tools are absolutely essential for large-scale data tracking in a contemporary business environment.
Perform consistent, thorough data analysis
Once you have identified your main sources of data and developed a system to help you track them, it’s time to start practicing formal data analysis. This should be a continuous and consistent process that you do over time in order to yield the best results.
Some of the most important areas of data analysis to track include the following items:
- Profit performance data
- Competitor performance data
- Present customer satisfaction rate data
- SEO software performance data
- Research on marketing tools
Being consistent about data analysis is one of the most important processes you can implement as a business. Without a consistent approach to gathering data, you won’t get an accurate enough picture of the trends and patterns you are trying to capture.
The last step in the process of making data-driven decisions is to use the data you collect to draw realistic conclusions. For instance, if your gross profit margin data indicates that profit has been low for the past two months, conclude that there is an issue that needs to be addressed.
From there, you can use the available data to work backwards and assess where the issue lies and what you can realistically do to change it. It may be an internal factor or an external one, and by examining the data you can pinpoint the root cause. Use every bit of data you capture as a tool to continually work on and improve your business model and your marketing—that’s what it’s there for.
Benefits Of Using Data To Inform Your Business Decisions
Aside from the fact that data is inextricably intertwined with the way businesses operate today, there are a plethora of great reasons to refine your data-tracking system. Here are five of them:
Prevent biased decisions
Bias can be dangerous, largely because we often allow it to guide our decisions without realizing it. When you use hard data instead of instinct to inform your decisions, you remove the potential for internal bias to fog up your strategy or even set you on an entirely erroneous course.
More confident actions
When you’re using unbiased data to help shape your business strategy, you can act more confidently. Data is impartial and objective, taking nothing but the cold, hard facts and showing real patterns of behavior, nothing more.
This allows businesspeople to become more decisive and confident leaders, making decisions without wondering whether they are misinformed or not.
Resolve unanswered questions
Running a business is a bit like raising a child. There are so many changes and growing pains happening all at once, it can be difficult to keep track of what is working and what isn’t. There will always be a new problem or challenge to deal with, but data can help you uncover them sooner rather than later.
Instead of trying to predict what problems will develop in future on your own, you can turn to data to visualize potential issues before your human eye can spot them.
Set realistic goals
The more informed your business is about its various trends and profit margins, the more realistically it can set its future goals. Accurate data analysis helps you cultivate a clearer picture of current operations, enabling you to set goals that are realistically achievable rather than hopeful ideations.
When It Comes To Gross Profit Margin Tracking, Let Data Lead The Way
If you know how to calculate profit margin you’re on the right track to making data-driven decisions that will benefit your business.
Whether you’re tracking gross profits or customer behavior, data is the key to unlocking a deeper understanding of the business you run. Gross profit margin is one of the sharpest indicators you have access to for understanding business health, so use it as the compass it can be.
With a plan in place to navigate your business’s operational data, you can not only improve gross profit margins, but also boost productivity, optimize management, and improve general productivity.