For good reason, you should always be aware of your profit margin because it provides important data regarding your company, including whether or not you’re profitable and if you’re pricing your goods appropriately. It’s crucial to keep in mind though that your profit margin is a number that you should always work to increase as well as measure. In this blog, we’ve gathered some tips on retail profitability to help you understand how to improve profit margins in your business.
What is gross profit? It is your overall revenue less the expense incurred to produce that revenue. Gross profit is just your sales minus your cost of goods sold (COGS). Your gross profit reveals how much money your business has left after paying for things like electricity, marketing, payroll, and so forth. The cost of items sold is subtracted from your sales to determine your gross profit. If put into a formula, it reads like this:
Formula for gross profit:
Sales – Cost of goods sold (COGS)
Gross profit margin
Let’s now discuss gross profit margin. What exactly is it? It pertains to a particular item that a business sells. Businesses can establish pricing for their products that make selling them profitable by calculating their gross profit margin.
Formula for gross profit margin
The cost of products sold is deducted from your sales, and the remaining amount is divided by the sales to determine your gross profit margin. If put into a formula, it reads like this:
Formula for gross profit margin:
(Sales – cost of goods sold) ÷ Sales
Net profit margin
Let’s imagine that you wanted to describe the profitability of your entire business rather than just one product; that would be your net profit margin. The net profit margin of an organization is shown as a percentage. The business is more profitable the higher the percentage. A low net profit margin is a sign that your business’s potential for profitability is being impacted by problems such as excessive costs (rent, utilities, labor, etc.), productivity problems, or even management issues.
Formula for net profit
You must first determine your net profit by deducting your total expenses from your total revenues before you can calculate net profit margin.
Formula for net profit
Total revenue – total expenses
Formula for net profit margin
Next, to express the value as a percentage, divide your net profit by your total revenue and multiply the result by 100.
Net profit margin formula
Net profit / Total revenue × 100
What factors influence profit margins?
The profit margins of a store are influenced by a variety of factors, including markdowns and promotions. When you sell something for less than its initial markup (IMU), your profit margin on that thing is really reduced. Because of this, choosing the appropriate markdown technique is crucial. Never assign a discount to a product haphazardly; instead, decide on a retail price that would attract customers seeking for bargains and be lucrative for your business.
Additionally, your point of sale can be helpful. Old inventory that wasn’t selling at full price is one of the key reasons retailers discount things. A retail point of sale system with inventory management features will prevent you from ordering excessive quantities of a product, avoiding the need to lower its price to get rid of extra stock in the first place.
The ideal profit margin
Profit margins differ significantly based on the sub-sector of a store and the goods or services they offer. For instance, the profit margins of an apparel business would differ significantly depending on the sort of items it offers (is it mid-range or luxury-focused?). Even if their individual profit margins are healthy for their respective sub-sector or specialty, an apparel store’s profit margins and a jewelry store’s profit margins would differ significantly.
Methods for strengthening your profit margins
After talking about gross profit and how to utilize it to determine a product’s monetary value for your business, let’s look at tried-and-true strategies for boosting profit margins in retail.
Improve your inventory buying to reduce markdowns
Every time you reduce the cost of an item, you’re also reducing the profit margins for that item. Therefore, wherever feasible, it is advisable to stay away from markdowns. Improving the management of your inventory, the stock you have on hand, the items that sell rapidly at full price, and the items that don’t, can help you prevent markdowns the most. You can usually discover this information in your POS system’s sales reports, which can help you choose which products to stock up on and how much to buy to satisfy customer demand, avoid overstocking, and completely avoid the need for markdowns and promotions.
Consider each season in advance
Most retail businesses go through their busiest time of year. For instance, business for hair salons might jump during prom and the holiday seasons. Retailers will have varying peak seasons depending on their line of work, the nature of their products, and their location. Retailers should develop the habit of checking their monthly-by-month annual sales information. Which months see the most sales activity? Is that pattern ongoing from year to year? Take advantage of those patterns as you plan your seasonal inventory purchasing.
Consider buying more of an item if you find that you sell more of a particular product type during a particular season to take advantage of its seasonality and increase sales. The possibility of receiving discounts from suppliers for early or large orders is a secondary advantage of preparing your seasonal inventory in advance. You might be able to reduce the COGS of that product, keep its retail price, and increase its gross profit.
Look for methods to save operating costs
A retailer can cut operational costs in a number of crucial areas. Consider labor costs initially, and stay away from overstaffing. Next, consider other expenses like the packaging of your products, shopping bags, and even the lighting in your store. Are there any expenses that could be minimized? It might be wise to spend money on energy-efficient commercial lighting in the lighting situation. By streamlining productivity, operational costs can also be decreased. Are there any repetitive duties that are consuming a significant amount of your time and the time of your staff? Anything involving data entry is a common offender.
However, automated data entry can be used for the majority of time-consuming jobs. Consider, for example, employing a two-way integration system rather than manually moving sales data from your point of sale system to your accounting software, which automatically sends information from one system to the other. Accurate bookkeeping will help you save time and reduce the amount of time you spend punching numbers.
Increase your average transaction value (ATV)
A great and doable strategy to boost profitability in your store is to enhance average transaction value (ATV). The interaction between a customer and a sales associate who is empathetic, knowledgeable, and non-obtrusive cannot be replaced by technology because retail is by its very nature a social activity. You could impart the skill of suggestive selling to your sales staff in order to increase ATV through social contacts. Once a customer enters your business, it is up to your sales staff to strike up a conversation, pay close attention to what they need, and identify products that meet those needs.
For instance, when a customer enters a skincare store, a sales associate can approach them and ask if there is anything in particular they are searching for. The customer can respond that they are looking for a product that is designed for dry skin. In response, the salesperson can suggest a great nighttime mask that’s available for dry skin. After all, according to HubSpot, when buying goods and services from a business with a reputation for providing excellent customer service, 68% of shoppers say they are willing to pay more.
In addition, the practice of visual merchandising, which is the promotion and display of your products in-store to help customers find what they’re looking for, find similar items, and make purchases. Retailers can also employ point of sale marketing to boost impulse buys and customer transaction value by positioning low-investment goods next to the cash register. Limited-edition holiday lip balms displayed at the front counter by a business would be a great example of this.
Looking for further guidance for your business? FTx has an array of solutions for your business needs. Get in touch with one of our specialists today to set up a consultation and demo.