How to Calculate and Improve Your Retail Profit Margins

How to calculate and improve your retail profit margins
|Updated on: July 1, 2022

Retailers know that making a healthy profit is essential to stay in business. On the other hand, pricing competitively is also essential to remain attractive to customers. So, the average profit margin of each product and the business is an important metric to track in the retail business. Sometimes, retailers may be so focused on improving the visibility of their brand and the volume of their sales that they lose sight of the profit margin.

We have some tips for retailers to improve their profit margins while staying competitive. These valuable expert tips help you boost your profit margins in the short and long term. To keep an eye on the profit margins, it is essential to understand how it is calculated. Using the correct data is essential to get a clear picture of the company’s profit metrics. Being successful in the retail market is not only about visibility, it is also about making enough money to sustain the business, make profit and thrive.

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What does profit margin mean?

The retail profit margin is the percentage of the total sales revenue that the business can consider a profit earned. It is the money that the business has left over from the revenue after the expenses. A retail profit margin tells you exactly how much money a business makes through its sales. You may compare two successful retail stores and find that one store has a higher profit margin than the other. So, when their sales volumes are the same, the store with the higher profit margin will make more money.

There are two terms that one should understand when studying a company’s profit margin; gross profit margin and operating profit margin.

The gross profit margin is the portion of the sales revenue after deducting the Cost of Goods Sold (COGS). The COGS is the cost of producing or acquiring the goods sold. The gross profit margin does not account for the taxes or the operational costs.

The operating margin considers all the costs incurred for operating the business. So, the operating profit tells you the company’s profit before taxes. So, even if the company makes a high gross profit margin, if operating costs are higher, the operating margin would be much smaller.

What is the average profit margin for retailers?

The profit margin of each retailer is unique to their products, management, supply chain, quality of service, and marketing costs. A retailer can manage its profit margins by tweaking all the factors that affect the profit margin. But, most industries have an industry average that one should be aware of. Most studies show that on average, the gross profit margin in retail is 53.33% globally. The highest retail margins are in the beverage (65.74%), jewelry (62.53%), and cosmetics (58.14%) businesses. Retailers of alcoholic beverages (35.64%), sports goods (41.46%), and electronics (43.29%) are among those with the lowest profit margins. So, there is a lot of variation between industries. There is also variation between geographies.

What is the net profit margin? (include calculation example)

The net profit margin is the number that tells you how much profit the company is retaining from the revenue after paying off expenses. A business should maximize its profit margin as much as possible to make more money.

The formula for net profit margin calculation is:

Net Profit = Revenue  – Expenses

Revenue is the total sales the business makes, while the expenses include the COGS, taxes, operating expenses, interest, and other expenses the business has incurred. You calculate the total sales for the given time period and reduce all the expenses that the business has incurred in that time period. This result is divided by the total revenue of the time period and converted to a percentage, the net margin percentage.

Net Margin = Net Profit / Revenue

Net Margin Percentage = Net Profit / Revenue x 100

For example, if a retail store generates a revenue of Rs1,00,000 in a quarter and incurs total expenses and overheads of Rs80,000 you can calculate the net profit and net margin percentage as:

Net Profit = Revenue  – Expenses = 1,00,000 - 80,000 = 20,000

Net Margin = Net Profit / Revenue = 20,000/1,00,000= .20

Net Margin Percentage = .20 x 100% = 20%

What is the gross profit margin?

The gross profit margin is the difference between the revenue and the COGS. It does not factor in the other expenses of running the business. It is important to calculate the gross profit margin to compare your business with the competitors and the industry average. The gross profit margin should not be so slim that you have difficulty sustaining your business. New businesses often have issues with stabilizing their gross profit margin, which should resolve as the business grows.

To calculate the gross profit margin, subtract your COGS from the revenue. This is divided by the revenue for the period and expressed as a percentage. For example, if a retail store generates revenue of INR 1,00,000 in a quarter and the COGS is INR 50,000 you can calculate the gross profit and gross profit margin percentage as:

Gross Profit = Revenue  – Expenses = 1,00,000 - 50,000 = 50,000

Gross Profit Margin = Net Profit / Revenue = 50,000/1,00,000= .50

Gross Profit Margin Percentage = .50 x 100% = 50%

What is a good profit margin in retail?

Retail margins vary by region and industry. But, what is a healthy margin if you are operating your business in retail? This also depends on the overhead costs. If you run a store in a simple setup such as eCommerce or a discount shop, your overheads will be lower and your profit margin higher. But, if you run a store in the most exclusive and expensive part of the city or town, your overheads will consume a significant part of your revenue. Your supply chain and inventory are also big contributors to the profit margin.

Consider your industry and its standard costs: A teaching or consulting business will likely have higher profit margins than a retail business, which pays more overhead expenses, such as rent, payroll, and creation or procurement of inventory.

8 Ways to increase your profit margins

 

  1. Be smart about the discounts you offer

Discounts attract customers. But, relying on discounts to improve a company's financial health is not always wise. When you slash the profit margin of the products by offering discounts, you may earn a sudden significant revenue, but it may not help the company's overall finances. If you need discounts to move specific products, perhaps, you need to display and market those products better. The more visibility your products have, the better the likelihood of a sale regardless of discounts. Implementing a Product Information Management (PIM) tool in your business management software will help you visualize your entire stock and make better purchasing, pricing, and stocking decisions.

If your stock is perishable such as food or other items, discounts may help move stock out of the store. Using data analysis tools helps determine the best time to put these items on discount sales for the least loss or damage. Past sales data is a valuable store of information that can reveal sales and customer behavior patterns. You can determine whether a deeper discount brought in more business than an offer for free shipping.

 

  1. Elevate your brand and increase the perceived value of your merchandise

Customers are willing to pay for something that they see value in. If you build your brand value and image to impress the customer with its value, you can charge more and enhance your profit margin.

Brand perception is created by sending subtle, indirect cues to the customer, such as the packaging, store design, signage, and advertising. You can also tailor the features of your product to better suit what the customer finds valuable. A customer would be willing to pay more for a product priced higher than the rest simply because of one standout feature.

Premium brands are a good example to learn from. They maintain an exclusive style through all their interactions with the customer. You will find that even the discerning customer is willing to pay far more than they would for an ordinary brand simply because of the perceived value of the brand. Cosmetic and smartphone brands are excellent examples of this. Coincidentally, they also have high-profit margins compared to the rest of the market.

As a retailer, you can switch the look and finish of your store, the kind of products you stock, and the customer experience. Customer service that is exemplary and attentive helps the customer feel special and inspires customer loyalty. When customers feel special, they are willing to pay more for the product. Some brands and stores partner with influencers to promote and advertise their brands to their target audience.

  1. Boost your average transaction value

In retail, training salespeople is one of the best investments. It is the salesperson who interacts directly with the customer. A helpful, knowledgeable salesperson, who makes a connection with the customer, is valuable. When they gain the buyers' trust, they can easily enhance the value of the sale by selling the customer a pricier product or adding more products to the basket.

For example, if a customer has come to your store for a smartphone, the salesperson can convince the customer that they should choose the latest model instead of the one they had decided on. This requires a thorough knowledge of model features and exceptional sales skills. The salesperson can also sell accessories that go with the phone purchase.

Offering incentives and making salespeople more competitive can help make all salespeople on the store floor enthusiastic about this. When customers spend more on every visit, your sales volumes increase, and the value of each transaction increases.

Product placement in the store is also important for increasing average transaction values. When you display all the accessories and related products with the primary product, more customers will be tempted to add accessories to their purchases. Some stores also display smaller high-value items nearer to the cash registers so that customers waiting in queues will add them to their carts.

  1. Reduce operating expenses

Two similar stores may have similar pricing and gross profit margin. But the store with the lower overhead costs will have a better net profit and operating margin. It is vital to reduce operating costs to enhance profit margins. Periodically review the expenses of the store and try to reduce or eliminate all the unnecessary costs. Good accounting software will help you compare your expense and revenue data to identify the expenses that are impacting your profit margin the most.

The optimal use of available resources helps you get the most out of the items you spend on. You can trim down the number of staff you have or ensure that you are helping your staff perform at their best. A staff member who is good at sales may be more useful on the store floor than in the store room.

Automation of routine tasks is a huge money saver. Instead of multiple accountants, you can use accounting software for complicated tasks and free the accounts staff to perform additional duties such as data analysis and sales strategizing. Inventory is easier to manage with good inventory management software and minimal staff. POS software that offers analysis and reporting features will reveal trends and help you stock items when in demand. A more efficient supply chain and inventory system reduce costs and delays. Use technology to save money, reduce wastage and enhance profit margins.

  1. Build rapport with your vendors and suppliers

The supply chain can help save money. Negotiate with suppliers to get the most advantageous prices. If transport and shipping costs are too high, work with suppliers to find a more cost-effective way of moving your supplies. Consolidate vendors so that you pay less shipping for bulk packaging. Buying in bulk is only an option if you have ample storage space. Else, just-in-time orders and deliveries are a better way to save money. A good relationship with suppliers also means extending your credit or being more flexible in payment. Vendors and buyers who work together gain advantages for both.

    1. Inspire your staff to do more

Human resources are the lifeline of a business. Keep your staff happy so that they will serve the organization and the customers happy. Train staff so that they become more efficient and productive. Staff should also be sensitized to the various ways in which they can help enhance the profit margin. Being able to provide the best customer service is essential for brand building. The ability to upsell and cross-sell is also essential for staff.

  1. Eliminate products with low-profit margins from your stock

Having a variety of products is essential in a store. But certain items take up inventory space and overheads while having very low-profit margins. Minimize these products so that your shelves are occupied with products that will make you more money. Products  with a profit margin of less than 20% can be eliminated or replaced with other similar items or brands with better margins.

Try to use your shelf space to sell items that give the business maximum returns. Some examples of items with low margins are cleaning products and baby products. If these items are not central to the products the store sells, eliminate them and see if there is any negative feedback from customers.

 

  1. Upsell or cross-sell your existing customers

Quite often, a customer will come to the store to buy a particular product and leave with

Something quite different. This may be the result of upselling, which is a technique by which the salesperson markets a more expensive product to a customer. Cross-selling is a technique by which the salesperson also sells other allied products to a customer who buys a certain product. An example would be a person who has come to a car showroom to buy a base model car. The salesperson upsells by convincing the customer to buy a higher, more expensive model because of its attractive extra features. The salesperson then cross-sells extra accessories such as seat covers and woofer speakers for the car. Talented sales people trained in sales techniques are a valuable resource for a retail store. They can help bolster the brand image, customer satisfaction, transaction value, and sales figures.

Software and how it can help boost sales and profit margins

In the retail industry, you need to be on-trend and in line with customers' desires. In addition to market research, companies can extract valuable information about customer behavior from their historical sales data. They can also use software to automate their business accounting and inventory for lower costs and higher efficiency and accuracy. TallyPrime is an end-to-end solution that can automate your business from the POS (point of sale) to the inventory and procurement processes. TallyPrime’s reports and analytics help you visualize and manage your entire retail operations. When you can precisely identify the items that affect your operating margin, you can better enhance your profits.

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