How to Increase Profit Margin: 15 Ways for Retailers
As a retailer, one of the most important things you can do is to keep an eye on your profit margins. After all, if your margins are too low, you won’t be able to stay in business for very long! There are a number of ways that you can increase your profit margin. Some involve making changes to the way you do business, while others may require changing the products or services that you offer. How to increase profit margin?
Here are 15 tips on how to increase profit margin for retailer stores.
What’s a good profit margin?
There is no one-size-fits-all optimal number for a good profit margin, as it varies widely from industry to industry.
The average profit margin in 2021 varies by industry. Advertising has a 0.34% profit margin while banks have a 20.98% profit margin on average. The total market average is 5.05%.
In virtually any case, at least considering some of the strategies listed here can be a big help. The profitability of your business will largely depend on the type of products or services you offer, as well as your target market.
However, it is almost always beneficial to try and improve your profit margin. There are a number of ways to do this, and even just considering some of them can make a big difference.
Types of Profit Margin
Let’s take a look at the different types of profit margin.
Gross Profit Margin
The gross profit margin is a key metric for assessing the profitability of a business. It is calculated by dividing gross profit by revenue and can be used to compare the profitability of different companies and industries.
Gross margin is a key metric for assessing a company’s profitability. It is most useful for companies when analyzing their product suite, as it provides insight into which products are the most profitable. However, aggregate gross margin also gives investors an idea of the company’s overall profitability.
As a rule of thumb:
Gross profit is the difference between your cost of goods and your revenue.
Operating Profit Margin
The operating profit margin is found by subtracting the company’s operating expenses from its gross profit. This gives us the company’s earnings before interest and taxes, or EBIT.
The operating profit margin is the primary source of a company’s profit from its ongoing operations. This figure is available to pay the business’ debt and equity holders, as well as the tax department.
It is often used as a way to calculate the value of a company for a potential acquisition. As a calculation:
The operating profit margin is a financial ratio that measures the percentage of profit a company generates from its operations. This ratio is calculated by dividing a company’s operating income by its revenue.
Pretax Profit Margin
Pretax profit margin is a measure of profitability that looks at earnings before taxes are taken out. To calculate it, take operating income and subtract interest expense while adding any interest income. Adjust for non-recurring items like gains or losses from discontinued operations, and you’ve got pre-tax profit, or earnings before taxes (EBT). Finally, divide by revenue to get the pretax profit margin.
The profit margin for every major business compares the amount of leftover profit from each sale to the cost of that product.
A company’s gross margin is the percentage of revenue that it keeps after incurring the direct costs associated with producing its goods or services. A company with a 42% gross margin means that, for every $100 in revenue, it pays $58 in direct costs and has a gross profit of $42.
15 Ways How to Increase Profit Margin for Retailers
You have spoken with your accountant to determine your current retail profit margin. You’ve also looked at your industry’s average retail margin and have a reasonable profit goal.
Let’s get you where you want to go. Here are some ways to increase your profit margins.
1. Raise Prices
Instead of raising your prices on all of your products, you can raise your prices for your most profitable ones. This will still allow you to keep some of your lower-priced offerings, while still bringing in more cash.
As a business owner, it is important to remember that customers are not necessarily buying your product because of its quality. They are often more interested in the experience your company provides, and the product itself is simply a secondary consideration. Therefore, by raising your prices you can improve your profits and margins.
If you have customers who are angry and purchase your products out of spite, you can take advantage of their emotions by raising the price. They are not just paying for the product itself, but also for the experience.
2. Narrow Your Focus
You can’t be everything to everyone, and you shouldn’t try to be.
I find that restaurants with long menus are overwhelming and I usually end up ordering something just for the sake of it. I much prefer restaurants with 10 items on the menus where each item is delicious.
If you’re making little profit from slow-moving inventory, consider moving that stock to faster-selling, higher-profit products.
3. Hold Off on the Discount
Offering a discount can be tempting, but it’s often not a good idea. Discounts don’t typically increase a retailer’s profit, and they don’t often lead to more sales.
The toy store owner I know always offers her Twitter followers a 30% discount on same-day purchases whenever she has bills to pay.
She thought it was brilliant. Only, it wasn’t.
This retailer was not maximizing her ROI by offering frequent discounts. By doing so, she taught her customers that it is better to wait for a sale rather than purchase items at full price. As a result, she was effectively robbing herself of potential revenue.
It is a good idea to have a quarterly promotions schedule, but discounts should be used sparingly. In the post-Covid world, customers seem to be more concerned with safety than price, so it is best to limit discounting.
4. Cut Waste
Are you outsourcing jobs that your current staff could do?
Take housekeeping for example. Do you really need to pay someone to do this task?
Assign mundane tasks to who you have, even if you’re not at full staff. Your retail profit margins will thank you.
5. Schedule Employees According to Need
Do you have too many employees working during slow times? Are you understaffed during your busiest times? Are you paying people to work when your business is closed?
Make sure your employees’ schedules are as efficient as possible. Don’t overwork them, but make sure you don’t lose business to competitors due to inefficient scheduling.
Your sales numbers can be used to guide your scheduling. You might find that Saturday isn’t always the busiest day because more people work from home.
6. No Overtime
I’m not suggesting you should abuse your retail staff.
Do not allow high-cost hourly managers to fill in for entry-level hourly employees. If something comes up, use salaried staff instead. This will help to keep costs down and maintain a professional atmosphere in the store.
7. Don’t Schedule for Convenience
If you want to improve your profit margins, try scheduling your employees for the amount of time you actually need them, even if it’s less than they would prefer.
If your area is still suffering from the COVID-19 pandemic, you may want to consider staggering your hours of operation. This will keep your business open and available to customers, even during these difficult times.
8. Award Extra Hours Based on Merit
Use the number of sales (or units per customer) to determine how many hours the employee should work.
It’s important to be firm with your staff, but you don’t want to come off as a jerk. Make sure you reward the behaviors you want to encourage and be clear about what those rewards are.
9. Hand Out Paychecks
If you look at the salaries of each employee, you can see the true cost of running the business.
Don’t just hand out checks without showing gratitude to the people who deserve it. Thank them for their contributions.
10. Give Bonuses When Deserved
If you want to avoid rewarding employees who use discounts to make sales, pay bonuses based on profit instead of total sales numbers. This is especially important for Expressive and Driver personality types, as they are more likely to offer discounts.
11. Track Theft and Fraud
A POS system with robust features makes it easy to track inventory levels, identify what has been sold, and determine what may be missing.
If you don’t have software to track employee fraud, there are still ways to do it internally. For example, one restaurant I know of compares the number of drink orders to the number of cups delivered. This is just one example of what you can do.
12. Cut Vendors
To get the best deal, buy from fewer vendors. This will save on pricing and shipping.
While buying from just one supplier is convenient, it’s usually more expensive. You’ll have to pay a higher price for each item, and you’ll have to fill out more forms.
Vendor orders can be a big challenge for retailers when it comes to merchandise planning, but streamlining these orders can help improve profits.
13. Combine Your Orders
Are other dealerships buying similar products from the same suppliers?
If you’re looking to save money on an order, consider adding on more items to get a larger quantity and a lower shipping rate. Just make sure that whoever is paying for the goods is clear on who will pay for what, then make payment before shipment to avoid confusion.
14. Bundle Products and Services
If you offer a service that people really need, they will be willing to pay you for it.
The Geek Squad promises that they’ll fix any tech issue, regardless of where or when it happens.
And of course, they left out “for a fee”.
Most people don’t like to figure things out for themselves. And they don’t want to mess up.
Adding value is the best way to create a profitable business.
15. Ditch Unprofitable Customers
Every retail store has that annoying customer who’s always complaining about the price, who gives you tons of headaches, and constantly calls with time-consuming issues.
If your company is large enough, you can ask your sales rep or order desk to give you a list of the top 10 complainers. Next, match these customers to the number of lucrative orders they generate.
There are a number of ways how to increase profit margin as a retailer. Some involve making changes to the way you do business, while others may require changing the products or services that you offer. By taking some time to assess your options and implement strategies that work for your business, you can boost your bottom line in no time!