This is one of the first lessons of retailing. Depending on when your financial year ends, now would be a great time to review your markups given that most businesses will have a P&L that shows their expenses and therefore the amount of Gross Profit required. You will either have fresh financials that you can act on to improve this years results or have interim accounts that will give you time to improve your markups over the remainder of the year. If you don’t have either available, your sales by department report should show you what you have been achieving so far.
Knowing the Gross Profit (GP) in percentage and dollar terms allows you to plan the sales required and at what markup, to generate the GP to run your business. You should review your last 12 months markup achieved (this is shown in the KPI report) and see if this is high enough to generate the GP dollars your business needs to meet your expenses and achieve your net profit goals.
If you aren’t achieving the level of markup you’d like it will generally mean one of two things – you are not putting enough markup on items when you are pricing them or you are giving away two much discount when you sell them. You should review the amount of discount that was given in the last 12 months and who gave it (and don’t be surprised if you find you’re the worst offender!)
If your business model is based on discount or your staff are more effective at discounting than you are at pricing, it is imperative that you have the markup to be applied locked into the heads of whoever prices your stock into the computer. Markup is almost always an issue of mind-set. Most retailers who don’t achieve a high enough level of markup are not failing to achieve more because their customers won’t pay it – they are failing to achieve it because they don’t ask enough in the first place.
Typically the answer to increasing the markup achieved is a combination of a better pricing policy and a planned reduction in discounting, but this won’t happen unless you believe you can ask for more for your product. Generally if a store owner tells me they can’t achieve more, I refer them to our industry comparison KPI’s and ask the question “so where do you rank for markup compared to your peers?” Generally they will see that there are others achieving better markup than they are. This provides a guideline of what’s achievable. Sometimes they may argue “yes, but I can’t do that in my market.” Most markets aren’t that different. If you rank 70th out of 120 stores for markup are there really 69 other markets that have it easier than you?
Buying well is important. Now is the perfect time to plan your purchasing. Knowing how much to buy, at what price, in which product categories and from which suppliers sounds very complex doesn’t it. It’s an old saying of real estate investing that you make your profit when you buy and this is true of retail. Make sure if you negotiate good prices that you keep that margin saving for yourself. You’ve earned it from your buying power – don’t give it away to the customer who only buys once.
Let’s break it down to some simple steps. To plan how much to buy you should know how much you plan to sell for the period. Look at the current product mix and see where there are gaps in your product categories or price ranges. Allocate additional funds (or use cash freed up from the sale of old items) as your open to buy. If you set up a Sales Plan all of this powerful information can be produced at the push of a button.
Get your buying right, maximize the margins you are putting on product and have an effective policy to deal with minimizing the discount. Markup is a series of steps controlled at each step along the way.