The hardest part of running a business is getting it off the ground. You need to come up with a business plan, figure out your retail location and space planning, hire a new team, order your products, and market toward your target customer base.
It’s really hard! So once you have those shoppers coming in your front doors it’s important that you maximize the value of each.
This does NOT mean that your start price gouging or even that you should necessarily even slightly raise your prices (though that is an option we’ll discuss). Doing so without warrant is unethical and a good way to lose business quickly. Instead, you should think about ways to increase profit margins fairly by continuing to add value to your customers. Remember, the goal is always to improve your customer experience and get visitors excited about coming back.
Below, we’ll look at some common ways that retailers can scale their business by improving their margins.
What Is a Profit Margin?
A business’s profit margin is the amount of money that is made on top of all costs of goods sold and operating expenses. A true profit margin will typically deduct all inventory, employment, rent, tax utility, and licensure costs along with any other business expenses.
A profit margin differs from profit by measuring profitability in terms of percentage. More on that below.
How Do You Calculate Profit Margins?
To calculate your profit margins use these simple steps:
Total your store’s revenue and total expenses (both direct and indirect)
Subtract all expenses from your total income to determine your profits
Divide your total profits by total revenue
Multiply this total by 100 to get your profit margins in terms of a percentage
Do Profit Margins Differ By Industry?
Absolutely. Profit margins differ wildly by industry type. Generally speaking, more inexpensive items come with slighter profit margins, while more expensive goods have higher margins.
Jewelers and high-end electronics have some of the higher profit margins, while alcohol and food have much lower margins.
Figure out what your industry’s standard profit margin is in order to help determine your prices.
If you’re brainstorming ways on how to increase profit margins, get started with this list. Implement a few of them and measure what type of difference they make for your business.
1. Figure Out Your Cost of Goods Sold (COGS) and Operating Expenses
This is the most important place to start. A cost of goods sold includes all direct costs – those of materials and labor. Operating expenses include all other indirect costs, such as marketing, utilities, rent/mortgage, business insurance, licenses, etc. Together they constitute your prime costs.
Without first calculating these expenses a business will have no foundation upon which to determine its pricing. Start with this before looking at other ways to increase your profit margin. It’s likely that many of the ways to do so will include reducing some of these very costs.
2. Raise Your Prices to Increase Profit Margin
The simplest way to boost your profit margin is to raise your prices. Raising your prices will make your margins bigger and boost your bottom line.
But, and it’s a big “but”, raising your prices is always risky. And most retailers are skeptical at the prospect of doing so. It can be an easy way to annoy your customers and lose business.
Instead of fearing it, though, retailers should take a hard look at their bottom line and determine if it’s necessary. There are times when raising your prices is unavoidable. And legitimate price hikes don’t gouge your customers.
Take other factors into consideration, too. Compare your products to those of your competitors. Do you offer better quality items? Also think about your customers. Are they the type to leave over a small price increase? What about your customer experience?
Pricing is a complicated matter. Treat it as such, and don’t be afraid of charging what is fair.
3. Maximize Average Customer Values
You can also increase your margins by incentivizing shoppers to buy higher margin items.
For instance, a common tactic is to give your impulse items a much higher margin. Selling more of these allows you to keep your everyday, popular products at a stable price.
Consumers all love good sales. But that doesn’t mean you should always offer exactly what they want. Running poorly planned promotions can be ruinous.
Remember, even slight discounts can have huge overall effects. For instance, if your profit margin is 20% and you discount an item 10% this means that you reduced your margin by 50%. You’ll need the attractiveness of the promotion to double your overall sales just to break even.
A good rule of thumb is to avoid all retail markdowns at almost all costs. Better inventory management will help you prevent markdowns that are triggered by overstocks. And better marketing and customer experience will help you prevent markdowns that are triggered by consumer demand.
5. Avoid Strict Price Competition and Add Value
It’s always critical to keep a close eye on your competition, but too many retailers take this to the extreme. Pricing is a classic example.
Instead of always trying to match exactly what your competitors are pricing items at, consider other intangibles that you offer. It’s likely that a higher price can be justified due to the quality of your products, customer service, location, clientele, guarantees, return policy, etc.
Consider all of these before simply price matching. It’s unfortunate, but no small business can afford to price like WalMart.
Many vendors will throw in free products to sweeten the pot. This lets the retailer try out a new product while improving their bottom line by eliminating those inventory costs.
Others will reduce the cost for items ordered in bulk. If you have the space and capital, order increased quantities to get bigger discounts.
7. Prevent Theft and Waste
Theft, loss, and operational waste are major killers of bottom lines. For many businesses, inventory costs are a substantial portion of their prime costs. So losing that money can quickly dig them into a hole.
Reduce product defects and problems with your suppliers
Cut back on overordering
Eliminate labor and supply chain inefficiencies
Lower shipping costs or pass the costs on
Prevent theft from your shoppers or staff
Redraw your store layout to minimize shrinkage and maximize sales
Shoppers remember their experiences with staff members as much as they remember the products themselves – good or bad.
Make sure your staff is well-trained and represents your store and brand. A great retail team can transform a shopping experience and help justify higher profit margins.
9. Get a Modern Inventory Management System
All of this gets a whole lot easier with a robust inventory management system. It will help provide insight into your product performance, suggest order quantities, automate vendor relations, determine optimal pricing, calculate profit margins and other KPIs, and a whole lot more.
Check out KORONA POS by clicking below and starting a free trial. Our software is designed for all of this and helps small businesses get their inventory on track while protecting their bottom lines.
Among other things, Michael writes about trends and tips in retail for KORONA POS. His focus is on bringing small business owners a more holistic approach to growth. In his spare time, you'll find him hiking somewhere in the southwest. Connect with him on LinkedIn.