4 Tips to Increase Margins in Your Store
I had a conversation with a retailer who was so excited about how well a weekend sales event had gone. They doubled their sales over the same period the year before. When I asked him what the gross margins were year over year (YOY), he had no idea. As we dug into the numbers, here is what we found:
|Sales||Gross Margin||Gross Profit|
So, while his weekend was a big success from a sales revenue, it was a big loss for the business. The markdowns caused the gross profit to plummet and to add insult to injury, this store was a commission based environment, so his compensation costs were double YOY, but he only has $200 more in gross profit to pay for it.
Does this scenario mean you should never run a sale? Absolutely not. However, it gives you a sobering view of the effect sales can have on your margins. With that in mind, here are four tips to help you maintain margins while feeding your inner need for a sale event in your store.
Every vendor has a list of inventory they wish they did not (just like you.) If you buy closeouts, you get an item for as much as 50% less than normal for you. This allows you to put the item on the shelf marked at the normal retail price and then sell it for less but still make your margins. For example, we used to buy a certain item on closeout every year. It normally cost us $50, and we sold it for $100. When we got it at closeout, we still marked it at $100 even though we only paid $25 for it. However, we put it on sale for 40% off, and we could not keep them on the shelves. If you are following along here, that was still $35 in gross profit per item sold.
Use Bundles Versus Direct Markdowns
One of the ways many retailers have been successful is to run a BOGO or Buy One Get One event. It is odd psychology for the customer, but it works. People will buy more merchandise with these types of vents even though the discount is the same. For example, you can run 25% off your entire store and have each person buy one item. Or you can run a Buy One Get One 50% off sale (same markdown), but they bought two items versus the one.
Pay the Sales Tax
When Texas first instituted a sales tax holiday for back to school, it was like getting a second Christmas. In fact, we did more that weekend in sales than we did during Black Friday weekend that year. The amazing part was that my margins were better. You see, the State of Texas said they would waive the sales tax on certain goods (all of the ones in my store) during a three day period each August. It means that the customer effectively saved 8.25% on their purchase. EVERY sale I ever ran in my store had a larger discount than that - the customer responded. In their minds, they were saving a ton. (Side note: make sure you understand the rules in your state for running a sales event like this. Not all states will allow it.)
Cash is Better than Dead Inventory
Now, this last tip may seem to be in contradiction to the others, but hear me out. One of the disturbing things is how attached we seem to become to our inventory. We buy an item and just know it is going to be a big winner and two months in, we have sold none. It is better to take a markdown and move on freeing up cash flow to replace that SKU with a new one that will turn. But we wait, and we take a little markdown and then a little more. Six months later we have successfully sold two of the eight of that SKU we have. In the meantime, we have been out of stock on another SKU that we could have sold three times by now, but could not afford to buy because we did not have the cash.
If you have dead inventory - kill it - and put you, your store, and your customers out of everyone's misery.