Profit margin is a measure of your profitability. The figure varies from business to business but is a pretty good indicator of how successful you are. As author Doug Hall says, “If your profit margins aren’t rising, chances are your company isn’t thriving.” With retail, some of the biggest brands commonly achieve profit margins of 50-60%. In 2017, Ted Baker had a profit margin of 60%, Inditex 57%, and M&S 56%.
Here are some tips to help you grow your profit margins to help you get ahead of the competition.
Monitor your expenses
Keep a close eye on your outgoings - staffing, rent, utilities, and stock should be affordable enough to give you a good chance of making decent profits. Analyse every area to see where you can cut costs and automate where possible.
When you buy new equipment for your store look not only at the purchase price but at the operating costs of competing models.
Speak to your suppliers about their prices and see if you can negotiate an improved deal. If you cut the number of suppliers but increase the size of your orders you should get a more favourable arrangement on prices.
Watch out for theft, both internal and external, by matching inventory to sales.
Don’t employ extra staff without ascertaining if the tasks could be completed by your existing team. Any overtime granted should be based purely on merit, i.e. average sales or number of units sold per customer. Bonuses should be proportionate to the amount of profit the business makes rather than total sales numbers.
Discounting might mean you get rid of stock faster but it can leave a considerable dent in your profits. Fashion giant Zara, for example, only reduce prices when they’ve got newer stock ready for sale, not simply because they want customers to believe they’ve bagged a bargain. Know your inventory and what historically sells well before you start discounting. This allows you to make better decisions around purchasing, sales and marketing and because of this you should sell more products without the need to discount.
“One way to maximize margins which also has other significant benefits is to have 100% visibility of inventory. By doing so, this minimizes markdowns and thus margin erosion “says Andrew Busby, Founder & CEO at Retail Reflections.
Discount pricing can also lower the perceived value of your products. In a double-blind study, consumers who paid full price were more satisfied than those who paid discounted rates.
When you offer discounts it’s perfectly possible to end up without any profits. While some of your discounted sales might be from people who wouldn’t have bought from you otherwise, you could also lose some profit margins from customers who were going to buy anyway at the original price.
It’s important to know your primary goal if you do go ahead with a discount strategy. If it is to acquire new customers then they can purchase what you offer at a discounted price with less risk. If you want to increase your sales by selling more units you could reduce prices for volume sales - or bundle products. If your aim is to increase customer loyalty then a discount is usually delivered via a loyalty programme for existing customers. According to research from Colloquy, 55% of people enrol in loyalty programmes to obtain discounts.
It might be that you need to get rid of old stock to make room for new products, update a product line or to focus on superior performing products. In this case the margins are not so important, you just need to offload the items asap with a decent discount.
Get rid of unprofitable products and customers
Economic wisdom says 80% of your business income will come from 20% of your products. Calculate the gross profit margin on each individual product you sell and you will discover that some of them are just an encumbrance and should be eliminated, while others bring in more than their share of profit. Streamline your offerings to include only your most profitable items, which might just give you the necessary impetus to create new and innovative offers.
The rule applies to customers as well: 20% of your customers probably account for 80% of your income. Calculate your gross profit margins by customer type and don’t be afraid to sever ties with unprofitable customers. Once you have identified your best customers you can spend your time attracting more like them to boost your bottom line.
Evaluation of your profit margins is best done after you’ve taken a full inventory, during the first quarter after the Christmas period or around tax time when you have a current profit and loss statement. Never be reluctant to find new ways to grow your profit margins.