Gross profit margin is — and will always be — a key metric in retail, as it enables you to make critical decisions around your assortment, inventory orders, pricing and promotions. For this reason, it’s important to not only measure your gross profit margins, but to continuously optimize them. Here are three tips to help your business do just that:
1. Gain better inventory visibility.
Getting a solid handle on your inventory is the first step to improving your gross profit margins. Knowing which products are selling, how much each item is adding to your bottom line, and what your gross margin return on investment (GMROI) is from your merchandise will enable you to make smarter decisions when it comes to product orders, in-store assortments and promotions, helping you avoid margin-killing markdowns.
Here’s an example: we once worked with a tea retailer in the Bay Area which kept a keen eye on its sales and product using its inventory management platform. Upon reviewing its reports, the company realized that while sales were increasing, shoppers were buying more of its low-margin items (e.g., accessories) instead of its higher-margin teas. To address this, the retailer decided to bundle its top-selling (but relatively low margin) accessories with its teas, and it sold those bundles at a good price. This move, along with other tweaks, enabled the retailer to increase revenues by 300 percent.
See if you can apply the same practice in your business. Identify your highest- and lowest-margin items, and keep an eye on their sales velocity. Are you moving products fast enough? Which items are taking forever to leave your shelves? Use the answers to these questions when optimizing your assortments and marketing tactics.
2. Increase the perceived value of your merchandise.
We recently conducted a study of 13,000-plus SMB retailers and found that their average gross profit margin is 50.96 percent. Beverage manufacturers and cosmetics retailers had some of the highest profit margins, at 60.68 percent and 57.94 percent, respectively.
That got me thinking: What do beverage manufacturers and cosmetics retailers know that others don’t? Why do they have higher-than-average gross profit margins compared to other retail categories? One reason could be their perceived value.
Chris Guillot, founder of Merchant Method, says that “beverage and cosmetic brands do a great job with brand management, playing to their customer base at an emotional level — status and lifestyle.” She says that “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.”
Guillot makes an excellent point. Many players in these categories are particularly good at positioning themselves as premium or “lifestyle” brands. Consumers are happy to pay more for certain beverages (e.g., pressed juices, premium coffee) and cosmetics because these products make them look and feel good about themselves — and that’s something you can’t put a price on.
If you’re looking to increase your gross profit margins, it may behoove you to evaluate your brand or product positioning. Would it make sense to market and sell certain merchandise at a premium? Is there a way for you reinvigorate your brand and form a deeper emotional connection with your target audience? Start with these questions to figure out how to increase the perceived value of your products.
3. Implement smarter pricing and promotions.
While no retailer wants to markdown its products, putting things on sale can sometimes be the only way to move unsold merchandise. That said, just because you’re running a sale doesn’t mean your margins have to take a huge hit. If you’re smart about your markdowns and promotions, you’ll be able to successfully sell more products without completely killing your margins.
One way to accomplish that is through personalized promotions. While some of your customers may be price sensitive and are prone to hunt for deals, you may also have shoppers who will convert at full price.
The key is to analyze your customer database and then tailor your promotions to each shopper’s preferences and price sensitivity. Doing so prevents you from giving too big of a discount to shoppers who would convert at a higher price.
Having certain restrictions around your promotions could also help. For instance, rather than blanket sales, why not add spending requirements (e.g., Get 50 percent off when you spend $240 or more)?
The bottom line is markdowns don’t have to wipe out your margins. Be smart about your promotions and pricing by ensuring that your offers are delivered to the right people at the right time.
Francesca Nicasio is the content marketing manager for Vend Point of Sale.