Margin Magic: Four Steps to Building Greater Profit
In times when response rates suffer and average order values decline, earning a profit in cataloging can be more of a challenge than normal. In this environment, your expenses (e.g., marketing costs, overhead, fulfillment) become a larger percentage of sales, thus leaving few, if any, percentage points left for profit.
Although there are many things you can do to check overhead expenses and keep marketing costs at a minimum, there’s one line on your profit and loss statement that can have the biggest impact on your ability to make money: cost of goods sold (COGS).
Before taking the steps to improve your margins, you’ll need to understand their building blocks.
Markup and Margin
The inverse of COGS is the margin. It’s calculated by taking 1 - (cost / retail). Some also refer to this as markup. However, the markup and margin are two different yet related numbers. The markup is expressed as a multiple of the retail price over the cost (1.0 would be selling at cost). The margin is expressed as a percentage of the difference in the retail price over the cost (0 percent would be selling at cost).
A retail operation’s margin dollars become the pool of money from which all other expenses and potential profit will come. Essentially, the sales line doesn’t really matter, and all eyes should be on the margin line.
Typically, a catalog operation works on a slightly higher margin percentage than a retail store. A common retail margin is 50 percent, which frequently is referred to as “keystone.” This means the retailer is doubling the cost for the retail price. However, the marketing costs of catalog operations (mailing expenses) normally are greater than the marketing costs (advertising) for retail operations of comparable sizes, and so common catalog margins are closer to 60 percent.