Profit Improvement Levers: The 5 Levers That Move Profitability
Every profit improvement maps to one of five levers. Here's how to prioritize them and practical tactics for each.
Key Takeaways
- •There are only five levers that improve profitability: Price, Volume, COGS, Operating Expenses, and Product Mix
- •Price is the most powerful lever—a 1% price increase typically improves operating profit by 8-12%
- •Volume improvements only work if contribution margin is positive; otherwise you accelerate losses
- •Cost reduction has limits; pricing and mix optimization offer more sustainable paths
- •Small improvements across multiple levers compound for significant profit gains
When profits need improvement, business owners often jump to the most visible solution—cutting costs. But cost cutting is just one of five available levers, and rarely the most effective one.
Every profitability initiative, every margin improvement, every strategic move maps to one of five fundamental levers. Understanding these levers—and their relative impact—helps you prioritize where to focus limited management attention.
The Five Profit Levers
Price
Volume
COGS
OpEx
Mix
This guide provides a deep dive on each lever: how it works, its relative impact, when to prioritize it, and practical tactics for implementation. We'll also cover how to sequence these levers for maximum effect.
The Relative Impact of Each Lever
Not all levers are created equal. A 1% improvement in pricing has a vastly different profit impact than a 1% improvement in operating expenses. Understanding this hierarchy helps you prioritize.
| Lever | 1% Change | Profit Impact* | Why |
|---|---|---|---|
| Price | +1% prices | +10% profit | Flows 100% to bottom line (no additional costs) |
| COGS | -1% direct costs | +6.5% profit | Improves gross margin; flows through to operating profit |
| Volume | +1% units sold | +3.5% profit | Requires variable costs; only contribution margin flows through |
| Operating Expenses | -1% overhead | +2.5% profit | Direct dollar-for-dollar improvement |
| Mix | Shift to higher margin | Varies widely | Depends on margin differential between products |
*Based on a typical business with 35% gross margin and 10% operating margin. Your actual results will vary based on your margin structure.
The Pricing Power Principle
Notice that price has 3x the impact of volume and 4x the impact of operating expense reduction. Yet most businesses spend far more energy chasing volume and cutting costs than optimizing pricing. This is backwards—start with price.
Lever 1: Price
The Most Powerful Lever
Highest impact, lowest investment, immediate results
Price is the most powerful profit lever because every dollar of price increase flows directly to profit. There are no additional costs—no materials, no labor, no overhead. Pure profit.
Why Pricing Is Underutilized
Despite its power, pricing is the most underutilized lever. Business owners fear customer backlash, competitive response, and volume loss. These fears are usually overstated:
- Fear: "Customers will leave." Reality: Most customers value your product/service more than you think. A 3-5% increase rarely triggers switching for a quality provider.
- Fear: "Competitors will undercut us." Reality: If you're competing purely on price, you have bigger problems. Differentiated businesses have pricing power.
- Fear: "We just raised prices last year." Reality: Annual price increases are expected and normal. Your costs rise every year; your prices should too.
Practical Pricing Tactics
Across-the-Board Price Increases
The simplest approach: raise all prices by a consistent percentage. Best for commodity or standardized offerings where value is well-understood.
- • Announce 30-60 days in advance with clear rationale
- • Tie to cost increases (labor, materials, compliance) when possible
- • Consider grandfathering existing contracts to maintain relationships
Selective Price Increases
Target specific products, services, or customer segments where you have the most pricing power or where margins are weakest.
- • Raise prices on differentiated offerings with limited alternatives
- • Increase prices for high-value services that are underpriced
- • Adjust pricing for cost-to-serve on demanding customers
Reduce Discounting
Discounting is "negative pricing." Reducing discount levels achieves the same effect as raising list prices without the headline risk.
- • Track average realized price vs. list price (the gap is your opportunity)
- • Implement discount approval thresholds requiring management sign-off
- • Train sales teams on value selling to reduce reliance on price
- • Eliminate automatic discounts that no one questions
Value-Based Pricing
Price based on the value delivered to customers, not your costs. This unlocks significant pricing potential for differentiated offerings.
- • Quantify the value you deliver (ROI, time saved, risk avoided)
- • Segment customers by value received (some get more value than others)
- • Create pricing tiers that capture different willingness-to-pay
The Price-Volume Trade-off
Yes, you may lose some volume with price increases. But you can afford to lose more than you think. A business with 30% gross margin that raises prices 10% can lose 25% of volume and still make the same gross profit. In practice, volume losses from modest price increases are typically 1-3%, not 25%.
Lever 2: Volume
Operating Leverage
Spreading fixed costs over more units
Volume improvement works through operating leverage: fixed costs are spread over more units, improving margins. But volume only improves profit if contribution margin is positive. Selling more of an unprofitable product accelerates losses.
When Volume Works
Volume Helps When:
- • Contribution margin is healthy and positive
- • You have excess capacity (people, equipment, space)
- • Incremental customers don't require significant new investment
- • You maintain pricing discipline (no volume-for-discount trades)
Volume Hurts When:
- • Contribution margin is thin or negative
- • Growth requires significant capital investment
- • Volume comes with price concessions
- • Quality or service degrades at higher volume
Practical Volume Tactics
Expand Wallet Share with Existing Customers
Selling more to existing customers is cheaper and easier than acquiring new ones. Cross-sell complementary products, increase purchase frequency, expand into new use cases within the same account.
Reduce Customer Churn
Keeping customers is more profitable than finding new ones. Every retained customer adds to volume without acquisition cost. Invest in customer success, address issues proactively, and build switching costs through service excellence.
Enter Adjacent Markets
Leverage existing capabilities in new markets—adjacent geographies, related customer segments, or complementary applications. This expands volume using existing fixed costs.
Increase Market Share in Core Segments
Focus sales and marketing on segments where you have competitive advantage. Concentrated effort in core markets typically yields better results than scattered efforts across many segments.
Volume Quality Matters
Not all volume is created equal. High-margin volume from ideal customers is far more valuable than low-margin volume from price-sensitive buyers. When pursuing volume growth, be selective—seek volume that resembles your most profitable existing business.
Lever 3: Cost of Goods Sold (COGS) / Direct Costs
Production Efficiency
Reducing the cost to produce or deliver
COGS improvements directly increase gross margin, which flows through to operating profit and beyond. For many businesses, COGS represents the largest expense category, making even small percentage improvements meaningful.
Components of COGS
What Goes Into COGS
Materials
- • Raw materials
- • Components
- • Packaging
- • Freight-in
Direct Labor
- • Production wages
- • Delivery/installation
- • Project labor
- • Benefits (direct)
Manufacturing Overhead
- • Equipment depreciation
- • Facility costs (production)
- • Utilities (production)
- • Quality control
Practical COGS Reduction Tactics
Supplier Negotiation
Materials often represent 40-60% of COGS. Reducing material costs through better negotiation has immediate impact.
- • Consolidate purchases with fewer suppliers for volume leverage
- • Regularly bid out major categories to ensure competitive pricing
- • Negotiate annual price holds or caps on increases
- • Explore alternative materials or suppliers
- • Evaluate total cost (price + freight + terms + reliability)
Labor Productivity
Direct labor costs are improved through productivity gains, not just wage pressure.
- • Standardize processes to reduce variation and rework
- • Invest in training to improve skills and efficiency
- • Implement lean principles to eliminate waste
- • Track and incent productivity metrics (units per hour, utilization)
- • Automate repetitive tasks where practical
Waste and Scrap Reduction
Waste is pure profit destruction—materials purchased but not converted to value.
- • Track scrap rates by product, process, and operator
- • Identify root causes of defects and rework
- • Implement quality controls earlier in the process
- • Set scrap reduction targets and review regularly
Process Optimization
Redesigning how work gets done can yield structural cost improvements.
- • Map current processes and identify bottlenecks
- • Eliminate non-value-adding steps
- • Optimize batch sizes and production scheduling
- • Consider outsourcing vs. in-house economics
Lever 4: Operating Expenses
Overhead Management
Controlling costs that don't scale with production
Operating expenses (OpEx) are the costs of running the business that don't directly scale with production: sales and marketing, general and administrative, research and development, facilities, and corporate overhead. Reducing OpEx improves operating margin directly.
The Overhead Challenge
Operating expenses tend to grow during good times and resist cutting during tough times. They accumulate through small decisions—an extra hire, a new software subscription, an expanded office—that seem reasonable individually but compound into margin pressure.
The Operating Expense Ratio
Track your operating expenses as a percentage of revenue over time. If this ratio is increasing, you have overhead creep—expenses are growing faster than revenue. A healthy business should see this ratio flat or declining as it scales.
Practical OpEx Reduction Tactics
Headcount Optimization
People costs typically represent 50-70% of operating expenses. Right-sizing staffing to actual needs is critical.
- • Evaluate each role: Is it essential? Could it be combined or eliminated?
- • Track revenue per employee—is productivity improving?
- • Replace turnover strategically rather than automatically backfilling
- • Use contractors for variable or project-based needs
- • Invest in tools and training that improve per-person output
Vendor and Contract Review
Subscriptions, services, and contracts accumulate over time. Regular review often reveals significant savings.
- • Audit all recurring expenses annually
- • Eliminate unused subscriptions and services
- • Consolidate vendors to gain negotiating leverage
- • Renegotiate contracts before auto-renewal
- • Benchmark rates against alternatives
Facilities and Real Estate
Office space is often oversized for actual needs, especially post-pandemic with hybrid work models.
- • Evaluate actual space utilization vs. square footage
- • Consider downsizing, subleasing, or relocating
- • Renegotiate lease terms at renewal
- • Optimize remote/hybrid arrangements to reduce space needs
Discretionary Spending
Travel, entertainment, conferences, and perks are easy to cut without affecting core operations.
- • Implement approval thresholds for discretionary expenses
- • Evaluate ROI on conferences, events, and sponsorships
- • Use video conferencing instead of travel where effective
- • Review perks and benefits for value vs. cost
Cost Reduction Limits
Operating expense reduction has diminishing returns. You can only cut so much before affecting capabilities, morale, or customer service. Use cost management to stay competitive, but don't expect it to drive sustained profit improvement. Revenue and pricing levers are more sustainable.
Lever 5: Product/Service Mix
Portfolio Optimization
Shifting sales toward higher-margin offerings
Mix optimization improves profitability by shifting your revenue composition toward higher-margin products, services, customers, or channels—without changing the underlying economics of any individual item. It's often overlooked but can have significant impact.
Understanding Your Mix
Most businesses have wide variation in profitability across their portfolio. A typical distribution might look like:
| Segment | % of Revenue | Gross Margin | % of Gross Profit |
|---|---|---|---|
| Premium Services | 25% | 55% | 39% |
| Standard Services | 45% | 32% | 41% |
| Commodity Products | 30% | 23% | 20% |
In this example, Premium Services generates 25% of revenue but 39% of gross profit. Commodity Products generates 30% of revenue but only 20% of gross profit. Shifting just 5% of revenue from Commodity to Premium would significantly improve overall margins.
Practical Mix Optimization Tactics
Understand Profitability by Segment
You can't optimize what you don't measure. Calculate gross margin by product line, service type, customer segment, and channel. Look for wide variation—that's your optimization opportunity.
Align Sales Incentives with Margin
If sales teams are compensated on revenue, they'll sell whatever's easiest—often lower-margin offerings. Align incentives with gross profit contribution to shift behavior toward higher-margin sales.
Train on Value Selling
Help sales teams articulate the value of premium offerings. Why is the higher-margin product worth more? What problems does it solve that cheaper alternatives don't? Equip your team to have value conversations.
Price Low-Margin Products to Shift Demand
If a product is low-margin and you don't want to sell much of it, price it accordingly. Either margin improves, or demand shifts to better alternatives. Don't subsidize low-margin sales.
Discontinue Margin Destroyers
Some products or services are simply not profitable enough to justify the resources they consume. Consider discontinuing offerings that are low-margin AND low-volume— they add complexity without contributing value.
Optimize Customer Mix
Not all customers are equal. Some are highly profitable; others barely break even. Calculate customer-level profitability (including cost-to-serve) and focus acquisition and retention efforts on high-profit customer profiles.
How to Prioritize: Which Lever to Pull First
With five levers available, where should you start? The answer depends on your specific situation, but here's a general framework:
Prioritization Framework
Start with Price
Unless you're clearly overpriced vs. competitors, pricing improvements should be your first focus. Highest impact, lowest investment, immediate results.
Optimize Mix
Shift sales toward higher-margin offerings. This often requires organizational changes (incentives, training) but minimal capital investment.
Improve COGS
Negotiate with suppliers, improve productivity, reduce waste. These improvements compound over time and improve competitive position.
Control OpEx
Right-size overhead, eliminate waste, improve efficiency. Important for preventing margin erosion, but limited upside as a profit driver.
Grow Volume (Profitably)
Pursue volume growth once pricing, mix, and costs are optimized. Volume at any cost destroys value; volume with healthy contribution margins creates it.
The Compounding Effect
The real power comes from pulling multiple levers simultaneously. Small improvements across all five levers compound into significant profit gains.
| Lever | Improvement | Example Action |
|---|---|---|
| Price | +2% | Annual price increase + reduced discounting |
| Volume | +3% | Expanded wallet share with existing customers |
| COGS | -2% | Supplier renegotiation + productivity improvement |
| OpEx | -1% | Vendor consolidation + discretionary spending review |
| Mix | +1 pt margin | 5% revenue shift from commodity to premium |
| Combined Impact | Operating profit improvement: 35-50% | |
Modest Gains, Major Results
Notice that none of these individual improvements are dramatic—2-3% here, 1-2% there. Yet combined, they can improve operating profit by 35-50%. This is why comprehensive profitability management outperforms any single initiative.
Getting Started: Your Profit Improvement Plan
Ready to pull these levers? Here's a practical approach to getting started:
Baseline Your Current State
Calculate gross margin, operating margin, and EBITDA margin. Break down gross margin by product and customer. Understand your current mix and profitability distribution.
Identify Your Biggest Opportunities
Where is margin leaking? Is pricing too low? Are certain products dragging down the average? Is overhead creeping up? Focus on the areas with the biggest gaps.
Set Specific Targets for Each Lever
Define concrete goals: "Increase average realized price by 3%" or "Reduce material costs by 5%." Vague goals produce vague results.
Assign Ownership and Track Progress
Each initiative needs an owner and regular review. Monthly profitability reviews keep focus on margins and create accountability for improvement.
Build Profitability into Your Culture
Make margin visibility a regular part of operations. Share profitability data with managers. Celebrate margin wins, not just revenue wins. Build a team that thinks about profit, not just sales.
Frequently Asked Questions
Which profit lever should I focus on first?
Start with pricing. It requires no capital investment, has immediate impact, and flows 100% to profit (unlike volume which requires variable costs). Most growing businesses are underpriced relative to the value they deliver. Even a modest 2-3% price increase can dramatically improve profitability.
How much does a 1% price increase improve profit?
It depends on your current margins, but typically a 1% price increase improves operating profit by 8-12%. For a business with 10% operating margins, a 1% price increase (with no volume loss) improves operating profit by roughly 10%. This makes pricing the most powerful lever available.
Won't raising prices cause me to lose customers?
Some price sensitivity is inevitable, but most businesses overestimate how much volume they'll lose. Studies consistently show that modest price increases (3-5%) result in minimal volume loss for differentiated products and services. The customers you lose are often low-value customers who were price-shopping anyway.
How do I improve volume profitably?
Focus on high-margin volume, not just any volume. Acquire customers similar to your most profitable existing customers. Increase purchase frequency from existing accounts. Enter adjacent markets where you can maintain pricing. Avoid volume that comes with price concessions or high cost-to-serve.
What's the difference between COGS and operating expenses?
COGS (Cost of Goods Sold) includes costs directly tied to production or delivery—materials, direct labor, manufacturing overhead. Operating expenses are costs of running the business that don't scale directly with production—sales, marketing, administration, facilities, R&D. Reducing COGS improves gross margin; reducing operating expenses improves operating margin.
How do I optimize product mix for profitability?
First, calculate margin by product or service line. Then analyze sales effort and resources devoted to each. Shift sales incentives toward high-margin products, train the team on selling value, consider discontinuing low-margin offerings that consume resources, and price low-margin products to either improve margin or reduce demand.
Should I cut costs or increase prices to improve profit?
Both have a place, but pricing is more sustainable. Cost cutting has diminishing returns—you can only cut so much before affecting quality or capability. Pricing improvement, backed by value delivery, is more durable and signals confidence in your offering. Use cost management to stay competitive while using pricing to capture value.
How do I know if my costs are too high?
Benchmark against industry peers and your own historical trends. Look at operating expense as a percentage of revenue—is it growing faster than revenue? Compare gross margin to competitors. Analyze cost per unit of output over time. If margins are declining while revenue grows, costs are likely outpacing efficiency gains.
Ready to Improve Your Profitability?
Eagle Rock CFO helps growing businesses identify and pull the right profit levers. From pricing strategy to cost optimization to margin analytics, we bring CFO-level insight to companies ready to build sustainable profits.
Schedule a Consultation