Can You Survive on Keystone Markups in Retail Today?
It’s a dog eat dog world out there from a retail perspective. As online sales continue to grow and more customers move their purchasing online from bricks and mortar stores, it’s increasingly difficult for entrepreneurial retailers to compete.
Online retailers have one big competitive advantage: They don’t have a store. And that lack of property means their overhead is lower, resulting in lower prices.
You as an independent retailer do have that overhead, so that means that your margins are going to be squeezed, leaving precious few profit dollars after your cost of goods and expenses.
Standard retailing metrics are built upon a keystone markup mentality -- that is, marking everything up 100%, resulting in a 50% cost of sales and 50% that can be allocated to expenses, with any leftover becoming profit.
But the escalating costs of operating a bricks and mortar store along with the conversion to online retailing have thrown the notion of the keystone model into the annals of retail history.
Mainstream retailers that manufacture their own goods (think GAP, Diesel, Guess, Pottery Barn and so many more) are operating at gross margins of seventy or eighty percent or more. That means after expenses, they’re making a hefty profit. Compare that with your keystone gross margin of 50% and you see why it’s tough to turn a tidy profit operating a single store.
So what do you do?
Three opportunities to increase your profits
- Reduce expenses. Given everything our economy has been through the past couple of years, you’ve probably already whittled your expenses down as low as they can go. But make sure to always take a look at expenses as you review your monthly expenses.
- Increase sales. Since your expenses are fixed, any additional sales should result in all of those dollars going directly to your bottom line after taking out your cost of goods. Because of that, increasing sales is a great way to increase profits.
- Increase your gross margin. Many retailers know they need to do this but aren’t quite sure how. Ultimately, you’ll want to push toward a 60% gross margin in order to give yourself a little breathing room financially (and actually make some money). Here are a few tips for increasing your gross margins:
- Increase your prices. Sure, you may have competitors down the block that are carrying the same lines as you are in which case your customers will be more price conscious. But you may also be carrying lines exclusively and that’s where the opportunity to increase prices can take hold. Fifty cents here, a dollar there all adds up. You will be competing with people who shop online who can sometimes buy products at a considerably cheaper price so take that into consideration when repricing.
- Don’t apply the same margin to every product. Have you ever purchased a travel sized product? You’ll pay a premium for those smaller sizes simply because retailer can charge more. If you conduct a cost per ounce analysis, you’ll see you pay more per ounce for a smaller size of just about any product. Make sure you’re applying the same metrics to your pricing and charge more for smaller sizes. Consumers expect value from buying larger sizes or in bulk but those rules don’t apply to smaller sizes so take advantage of it.
- Hit up your vendors for better margins. We’re still in a world where most vendors realize you need them more than they need you and they’re willing to deal a bit more than before. So ask them what they can do to give you a better margin. Can you commit to a higher sales volume for the year, or can you commit to increasing your units purchased? Both of those offer potentials for a better margin. You don’t get if you don’t ask. If you can’t achieve the goals for a better margin, ask the vendor what other tricks they may have up their sleeve. If the brand you’re considering bringing in isn’t willing to deal, perhaps finding a different brand that can offer a better margin is the way to go - and don’t be afraid to share that thinking with vendors.
How are you going to increase your gross margin to increase your bottom line?
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