Employ a Detailed Approach to Merchandise Analysis
From a “bottom up” view, catalog/multichannel marketers must consider every aspect of an item’s performance or life cycle to ensure every touchpoint to profitability is being considered properly. An item’s profitability is impacted by much more than simply demand and margin.
I offer a top-down approach, which is extremely critical to the planning process. I also go to the opposite spectrum, however, and consider detail levels that often are overlooked when considering an item’s true profitability. If you hold your products to higher standards by factoring all their costs up front, you can gain greater profit to the bottom line. Let’s break down these components of profitability as part of a post-season analysis.
Determine Price, Profitability
Merchants often are pushed to achieve the highest possible margin. If an item’s price point is pushed beyond consumers’ view of “value,” however, then the item’s margin percent will yield nothing in terms of contribution. As you consider setting an item’s price, the way to ultimate profitability is to determine the retail price first, then find or negotiate the lowest cost possible to achieve that initial margin target. Bear in mind that an item may produce more margin dollars by increased unit volume at a lower margin vs. trying to achieve a higher margin percent.
In addition to item cost and retail price to determine initial margin, the next factor to consider is actual demand. Demand nets to actual sales, so you must factor item cancellations and returns. Then determine the initial gross margin by subtracting cost of goods sold (COGS). Most analysis simply adjusts for the actual cost of goods sold. What about the overstock that is generated and the subsequent cost of liquidating that overstock?
These are truly components of COGS and should be factored, as should the cost of returns (the difference between returns to good stock and those returns that are damaged).