A profit margin isn’t just something that retailers should measure; it’s a metric that retailers should strive to continuously improve.
As author Doug Hall wrote, “If your profit margins aren’t rising, chances are your company isn’t thriving.” To help do just that, here are some pointers that can enable retailers to widen their margins:
Lower the cogs
Take a closer look at all materials and procedures required to create or source your products and establish how these materials can be purchased for less without compromising the quality.
Is it necessary to order larger quantities? Are there any middlemen or administrative expenses that can be cut from the process?
Consider these things carefully and then take action accordingly. Let’s say a retailer needs to increase order quantities for a particular item to lower its price.
In this case, the retailer should first look at inventory data and determine if he can afford to order certain items in bulk. If not, would it be possible to consolidate orders with other items or team
with other purchasers to increase buying power?
This is something that large retailers have been doing for quite some time now. A few years ago, for example, Walmart sought out co-purchasers for raw materials so the chain could consolidate purchases and get more buying clout.
Explore options and run them by suppliers to see if better deals can be negotiated. If suppliers won’t budge, don’t be afraid to check out other suppliers to find out if they can offer more favourable terms.
Make sure existing suppliers are aware of this though, as they might end up offering better rates.
Increase prices
Setting prices at a higher level enables retailers to make more money on each sale, thus increasing margins and improving the bottom line; however, retailers can baulk at the prospect of increasing their prices out of fear that they’ll lose customers.
Pricing decisions depend on each company’s products, margins and customers. The best thing to do is to look into your own business, run the numbers and figure out your pricing sweet spot.
On top of considering basic pricing components like costs and margins, look at external factors such as competitor pricing, the state of the economy and the price sensitivity of target customers.
Also take the time to consider what types of customers you want to attract. Do
you want to sell to shoppers who would take their business elsewhere just because they could get an item for less, or would you rather attract customers who don’t base their purchase decisions solely on price?
It’s surprising to find that the majority of your regular customers may actually belong to the latter group – a study by Defaqto found that 55 per cent of consumers would pay more for a better customer experience.
Taking all these things into consideration, a price increase can be calculated and tested on a few select products. Retailers can then gauge customer reaction and sales from there.
Also consider implementing creative or psychological tactics when coming up with prices in order to make them more appealing. Tiered pricing is one effective strategy.
In order to combat cheaper knock-offs, one US shoe retailer, Footzyfolds, decided to revamp its prices – but not in the way one might think. Instead of lowering prices across the board, Footzyfolds introduced a high-end category for its products.
With the new pricing format, it lowered the price of its everyday products to $20 a pair and introduced a new ‘Luxe’ category for $30 a pair.
Owner Sarah Caplan told the New York Times that the move helped increase revenue dramatically.
“We actually have had the most interest in our higher-priced shoes,” she said, adding that the business reported a 100 per cent increase in revenue after launching the high-end line in the summer of 2010.
The way to communicate new prices is just as important as the prices themselves, so put thought into how these messages are relayed to customers. Give shoppers a heads up prior to any price hike; let them know it’s happening and how it’s going to benefit them.
Also, be sure to communicate differentiating factors as well as value in service. Justify higher prices by telling customers why the store is different or better than the competition.
Ensure customers are aware of it however this is demonstrated.
The right price increase could improve a store’s bottom line significantly enough to offset any losses from shoppers who decide not to buy from you. Additionally, having fewer customers helps lower operating expenses while freeing up staff to increase service quality at the same time.
Reduce expenses with automation
Automation can do wonders for productivity as well as the bottom line. By putting repetitive activities on autopilot, retailers can reduce the time, manpower and operating expenses required to run a business.
Are there any cumbersome activities that are eating up the time of your staff members? Take note and then look for solutions that can take care of them automatically.
For instance, to save time and operating expenses, I know of one menswear store that automated the task of transferring sales data to accounting software.
Rather than manually plugging the numbers into the program, the owner integrated his point-of-sale system with accounting software and got the two tools talking to each other so that information was automatically transferred from one program to the next.
The result: he has been able to free up time so he and his staff could devote more energy to helping customers. He estimates that the automated system in his store ‘saves’ 40 to 80 hours a week.
This doesn’t just apply to data entry. These days, there’s an app for most of the boring administrative tasks.
Optimise supplier relationships
Earlier in this article, I mentioned negotiating better contracts with suppliers to reduce the costs of goods and widen margins. Consider building stronger relationships with suppliers.
Ask if there’s anything that can be done to make things easier or more cost-effective for them so they can fulfil orders in a more efficient way.
Strengthen relationships with suppliers and determine how you can work better together. Doing this can help you identify ways to reduce product costs and operating expenses. At the very least, it should improve workflow and productivity.
Personalise your offers
Another effective way to improve margins is to offer tailored discounts. Remember, not all customers are wired the same way; some people may need a discount incentive to convert while others don’t really require a lot of convincing.
Identify how big of a discount is necessary to convert each customer. Case in point: Online bicycle retailer BikeBerry.com sought the help of a big data company to analyse customer behaviour and gather intel on the past purchases of customers, their browsing histories and more.
The store got to know its customers and was able figure out the most cost- effective way to convert each one.
BikeBerry then created a series of email campaigns with five different discount offers tailored to each individual, including free shipping, 5 per cent, 10 per cent, 15 per cent or $30 off new products.
The campaigns ran for two months and the business not only increased sales within that period but also widened its profit margins by not offering discounts to customers who would convert at a lower threshold.
Instead of offering blanket discounts, go through the purchase histories of customers and personalise offers based on their behaviour and preferences. Doing so won’t just increase the chances of conversion; it’ll also help you maximise margins.
A retailer doesn’t always have to make drastic changes to a business to significantly improve the bottom line. As this article has shown, sometimes a simple tweak in pricing or a phone call to a supplier can pave the way for wider margins.