Let’s first understand the concept of profit margin & retail.
Profit margin simply means the percentage of profit on total sales value. So, if the monthly sales value from your retail store is $ 1,000 & you have earned a profit of say $ 200 then your retail profit margin comes to 20%.
Profit margin can either be gross profit margin or net profit margin.
Gross profit margin is the percentage of gross profit on total sales value. Gross profit is calculated by deducting direct expenses & purchase value from total sales value.
So, Gross profit = Total sales value – (Total purchase value + direct expenses)*
And, Gross profit margin = (Gross profit/ Total sales) *100
*[Ignoring stock adjustment]
*Direct expenses are the expenses incurred to bring goods to present location or condition. Example: Freight inward to bring goods from supplier location to your store.
Net profit margin is the percentage of net profit on total sales value. Net profit is calculated by deducting indirect expenses from gross profit.
So, Net profit = Gross profit – Indirect expenses **
And, Net profit margin = (Net profit/Total sales) * 100
**Indirect expenses are the expenses incurred to operate a business. Example: Salary, rent, stationery etc.
For the purpose of this post, profit margin implies net profit margin.
Retail, on the other hand, means the sale of goods to final consumers via a retail store.
The retail industry is one of the largest industries on earth. In fact, in the US alone, the total retail sales in 2017 touched $ 5,733 billion.
The are various advantages enjoyed by the retail industry:
- Evergreen demand
- Lesser capital requirement
- No technical skills required
- Easy to start, operate & scale
With various advantages comes a big drawback: High competition (So, lesser profit margin).
Since a retail store is easy to start & promises stable sales, there are many players. With more number of retailers (& overall same line of products) comes stiff price competition. This is the core reason why retail industry experiences low-profit margin.
And, to add a pinch of salt to the injury, there are many cash-rich e-tailers who are denting the retail industry with their jaw-dropping prices.
Still, there is one factor that can help the physical retail industry to trump over internet retail industry. That is customer experience.
Take some cases in point where retailers achieved tremendous success. Yes, it’s possible.
So, let’s dive in to discuss some strategies for improving retail profit margin.
7 WAYS TO INCREASE PROFIT MARGIN IN RETAIL
1. Purchase Strategically With QCB Formula
No matter what tips you try, you can’t increase your retail profit margin until unless you buy your stock at the BEST price. That’s where my QCB formula steps in.
QCB stands for Quote, Cash & Bulk.
Quote + Cash + Bulk = Best purchase price.
Quotes From Maximum Suppliers
The quote means to get the best purchase price, you should invite quotes from as many suppliers as possible. To get a list of suppliers, visit a trade association or search through local trade directories or Google. Make sure that you take into account the location of suppliers as well when evaluating their quotes (since logistics cost may change the equation). Of course, the price should not be the only factor, you have to ensure product quality as well.
The cash means that you should always prefer offering cash to the supplier instead of taking credit. The logic behind this is that cash purchase generally results in low purchase prices. Take an example: Your present supplier is offering you 100 units of a product at $3 per unit for a credit term of 15 days. What if you offer him an outright cash purchase? Yes, he may lower the price to $2.80. That’s a 7% decrease in price! Of course, I do understand that it’s not always possible to buy in cash due to cash flow issues.
The bulk means that you should aim to buy in bulk quantity. Continuing with the aforesaid example, what if you increase the requirement from 100 to 150 units. Yes, the supplier may give a further discount in price. What is that right bulk quantity? Well, it’s all about that sweet spot between demand & price.
So, if you buy with asking quotes, selecting the best supplier, negotiating with cash payment & bulk quantities then there are high chances that you would be getting the best market rate for your products.
Cheap purchase price obviously means more retail profit margin.
2. Go Online (Locally)
If your retail store isn’t online then you are missing out on a massive opportunity to maximize your profit margin.
No, you don’t need to hire a web developer or get involved in technical stuff.
Shopify makes it extremely easy for any store owner to start an e-commerce store within a matter of few minutes. They have a ton of beginner-friendly guides to help you get started.
But why do you need an online store in the first place? How’s that going to help in to earn more profit margin?
Well, it’s all about maximizing revenue without any effect on related cost. Imagine, you are aiming to double your store’s sales by next year. Now, can you do that without a significant increase in your cost figure? Probably not. Because, you need to invest in a new store, new people & infrastructure.
Now, imagine the same sales target with an online store. Yes, you don’t need to add extra cost to double your sales figure. That’s where the margin starts to improve.
Of course, with an online store, you will be incurring logistics cost but the same can easily be recovered from customers.
Also, please take care that you serve only local customers at the beginning because state or national level deliveries can shoot up costs & other complexities.
3. Cross Sell & Up Sell Most Profitable Products
This is one of my favorite strategies.
Cross-selling means offering a related (& affordable) product to a prospective or existing customer during or after the checkout. Example: You offer a toothbrush (cross-sell product) to customers who have added a toothpaste to their shopping cart.
Up-selling means offering a related (& expensive) product to a prospective or existing customer during or after the checkout. Example: You offer a premium brand toothpaste (up-sell product) to customers who have added a general brand toothpaste to their shopping cart.
Big retail brands use the cross-sell & up-sell strategies very intensively. Why? Because the conversion rate for such offers is generally high (as the target audience is already qualified).
At what point of a customer’s shopping experience should you pitch these cross-sell & up-sell products? I prefer during the checkout process itself. Train your cashier to do so.
Now you understand why big retail stores have petty products cluttered around the checkout counter? That’s right!
Make sure that you only include the most profitable products as a part of this strategy.
4. Prioritize Products With ABC Analysis
What if your store’s most profitable products (with high sales volume) run out of stock? Of course, you would lose the chance of making more money via higher profit. 🙁
This is why I recommend the ABC analysis of your stocks.
Under ABC analysis, you need to segregate the stocks of your store into 3 categories namely A, B & C.
Under A category falls your top profitable products (with high sales volume). B category lists your decently profitable products (with average sales volume). Rest products fall under C category.
So, you need to make sure that A category products remain available(in stock) always. They are your top-priority products.
After that, the second level priority caution should be given to B category products. Next, come C category products.
This strategy ensures that your store never runs out of stock. Even if it does (C category products), your profit margin won’t suffer.
5. Reduce Inventory Cycle With JIT Purchase
Inventory cycle is the number of days it takes to convert an inventory into a final sale. For example: If the inventory inward was recorded on 1st April & it was finally sold on 15th April then you can say that the inventory cycle is 15 days.
A longer inventory cycle means more money being blocked in stock. Keeping adequate or bulk stock is fine but it comes with a heavy carrying cost (Rent & interest on money blocked in stock).
If you reduce the amount of stock to a level which just meets the demand, you will be able to release substantial money which can be put to more productive uses.
But, how to reduce the inventory cycle without hurting the sales? This is where JIT purchase steps in.
JIT stands for Just-In-Time.
The JIT purchase principle was first used by Toyota, the Japanese automobile giant. Under this principle, goods are ordered only & when they are needed or in demand.
JIT purchase, if used correctly, can bring down the inventory cost dramatically. Not only profit margin, this proven practice is known to improve cash flow as well.
Of course, to use this strategy effectively you need to forecast demand accurately.
6. Eliminate Non-Sales Expenses
Entrepreneurs (including retail store owners) generally struggle with qualifying expenses as necessary & not-so-necessary. How do we identify & incur only those expenses that are absolutely essential?
Well, I do a simple test to determine if an expense is worth pursuing.
I look at the basic nature of an expense. If it adds value to an organization from sales perspective then it worth or else it isn’t.
Examples of certain expenses that add value from the sales perspective:
- Salesman salary
- Branding & packaging
- Advertisement & marketing
- Cashier’s salary (since he or she indirectly helps in sales process)
Example of certain expenses that don’t add value from the sale perspective:
- Security expenses
- Fancy store design
- Over-staffing for the administration of store
To eliminate non-sales expenses, you will need to take some harsh calls. It’s not going to be easy but will definitely be worth in terms of better profit margin.
7. Embrace Private Labeling
Private labeling means having your store’s brand name on the product manufactured by a contract manufacturer.
Having private label means giving a brand name to an otherwise non-branded product. A brand name adds the much-needed authenticity element to a product. And, your customers are ready to pay a premium price for such authentic products.
Many established retailers are using this strategy to charge their profit margin upwards.
Not only contract manufacturers, you can get in touch with some micro-entrepreneurs to get your private label on goods manufactured by them.
Micro-entrepreneurs are a great choice for your private label mission since they can manufacture stuff at unbelievably cheap prices (since most of them are home-based).
So, we have got our 7 unique ideas covered: Purchase strategically with QCB formula, Go online(Locally), Cross-sell & up-sell most profitable products, Prioritize products with ABC analysis, Reduce inventory cycle with JIT purchase, Eliminate non-sales expenses & Embrace private labeling.
You can easily fix your retail store’s profit margin by implementing the aforesaid strategies. Do give them a try.
How do you plan to increase the profit margin of your retail store? Please comment below.