Now that you have a better idea of the amount of profit that retailers are taking in, it’s time to look at the specific ways that you can increase your profit margins.
Here are 10 things you can try:
1. Avoid markdowns by improving inventory visibility
Markdowns are notorious profit-killers, so avoid them whenever possible. How do you do that? Start by improving how you manage your inventory. You should always have a handle on the merchandise you have on hand, as well as what your fast and slow-movers are. This will help you make better decisions around purchasing, sales, and marketing, allowing you to sell more products and reduce the need for markdowns.
2. Elevate your brand and increase the perceived value of your merchandise
It’s interesting to see that cosmetics retailers have some of the best margins in retail. According to experts, one reason behind this is the fact beauty and cosmetics brands excel at creating personal and emotional connections with customers.
Beauty is a category on fire…The price value equation is quite good, cosmetics make people feel better about themselves and foster strong customer loyalty, and the merchandising creates a sense of exploration…”
– Laura Heller, Editor, Retail Dive
She continues, “We ran a story earlier this year titled “Why beauty will continue to rule retail in 2018” that outlines some of the reasons behind this trend. The product category creates a kind of personal connection with shoppers, unlike many other consumer goods. The price value equation is quite good, cosmetics make people feel better about themselves and foster strong customer loyalty, and the merchandising creates a sense of exploration — something the off-price retailers have also done quite well. Depending on the brand, packaging, and marketing attached, the profit on each small item can be really high.”
Chris Guillot, Instructional Designer of Merchant Math and Founder of Merchant Method, offers a similar view, saying that “cosmetics brands do a great job with brand management, playing to their customer base at an emotional level — status and lifestyle.”
According to Guillot, “Retailers of all sizes and stages of growth can focus on their unique brand positioning as a way to differentiate from their competitors and increase perceived value.”
3. Streamline your operations and reduce operating expenses
“Retailers often focus on pricing strategies when searching for ways to increase profits, but most should try to start with streamlining operations,” says Krista Fabregas, a retail analyst at FitSmallBusiness.com
“First, cut overtime and excess staffing as much as possible, then focus on areas of waste. Minimize supply: spend as little as possible, and ditch the fancy printed shopping bags, tissue fill, and excess packaging wherever possible. If you’re not using an efficient point-of-sale to tie inventory, sales, and marketing under one system, consider making a switch to a low-cost system. This makes your entire store and staff run more efficiently.”
Another great way to streamline your operations is to automate specific tasks in your business. By putting repetitive activities on autopilot, you can reduce the time, manpower, and operating expenses required to run your business.
Go through all the tasks that you and your employees complete day-to-day, and see if you can automate any of them. Are there cumbersome activities that are eating chunks of your time? Do you have to re-enter any data or perform certain steps more than once? Look for solutions that can take care of them for you.
Take, for instance, Crane Brothers, a contemporary menswear retailer. To save time and operating expenses, Murray Crane decided to automate the task of transferring sales data to his accounting software. Rather than manually plugging the numbers into the program, he integrated his point-of-sale system (Vend) with his accounting software (Xero). He got the two tools talking to each other so that information is automatically transferred from one program to the next.
The result? Murray was able to free up time so he and his staff could devote more energy to helping customers. He also estimates that the automated system in his store saves him forty to eighty hours a week — or one to two full-time employees.
Data entry isn’t the only thing you can automate. These days, there’s (usually) an app for most of the tedious administrative tasks in your store.
If you regularly make appointments with customers, for example, consider using an app such as Timely, which streamlines bookings and sales, and even sends automatic appointment reminders to your customers. Do you spend a lot of time managing employee shifts? Check out Deputy, which lets you and your staff coordinate schedules from your mobile devices and sends shift changes and notifications for you.
4. Increase your average order value
Increasing the basket size or average order value (AOV) from shoppers already in your store is a great way to improve your profits. You’ve already invested in getting them to your location; now go and find ways to maximize their spend.
Start with upselling and cross-selling. As Matthew de Noronha, Head of SEO at Eastside Co., puts it, “someone who makes a purchase from you has already been qualified. They have engaged with your brand and, while it may sound obvious, they are significantly more receptive to offers and product advertising. For that reason, it makes complete sense to encourage them to spend more.”
Matthew says that you can start by finding products likely to be purchased together. Then, after a user has committed to purchasing a product, encourage increased spending by recommending relevant items.
Check out what apparel retailer Francesca is doing. Most of the brand’s product pages have a “Complete Your Look” section containing products that complement the item being viewed. This encourages shoppers to add items to their cart, increasing their AOV.
Strategic product placement in-store can also increase AOV. Adam Watson, director of Decorelo, recommends putting “your most profitable products in the shop window and in the best area customers naturally go to in the store so as many eyeballs see them as possible.” Doing so will help you sell your most profitable items, contributing more to your bottom line.
Another tactic is to “put your best sellers and upsells near the counter for impulse buys to increase average order value,” says Adam.
5. Implement savvier purchasing practices
Whether you’re at a trade show looking at new products or at the negotiating table with your suppliers, make sure you’re always finding ways to lower costs.
Think about the final cost
One of the best ways to do this, according to business coach Lindsay Anvik, is to “approach products by factoring in the final cost (i.e., wholesale cost, taxes, shipping, etc.). Once you have that final figure, ask yourself, ‘Would I pay X for this?’. If you wouldn’t, you need to find a way to lower the cost or move on from the product.”
Ask for vendor discounts or offers
Lindsay also recommends asking for discounts (e.g., free shipping) or other offers (e.g., throwing in a couple of extra products for free). This works particularly well when you’re buying in bulk.
Lindsay, for example, once helped her client “negotiate $2 off of every garment they ordered. The client was a top customer, paid on time and was easy to work with. The vendor was happy to give this discount because it didn’t hurt his bottom line too much. And because my client was a good customer, he was willing to negotiate to keep her happy.”
Increase order quantities
Let’s say you need to up your order quantities for a particular item to lower its price. In this case, you could look at your inventory data and determine if you can afford to order certain items in bulk. If not, would it be possible for you to consolidate orders for other items (or with other purchasers) to increase your buying power?
This is something that many large retailers have been doing for quite some time now. A few years ago, for example, Walmart sought out joint purchasers for raw materials, so they can consolidate purchases and get more buying clout.
Explore your options and run them by your suppliers to see if you can negotiate better deals. If they don’t budge, then check out other vendors to find out if they can offer you more favorable terms. (And make sure your existing suppliers are aware of this — they could end up giving you better rates.)
