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Profit vs. Sales…. Let’s go Old School!

           

April 16, 2019 / fbcadmin

Tim Sheaves
Foundational Retail Consulting
1300765249

As a young man fresh out of High School I followed my father’s footsteps into the wonderful world of Retail, by starting what I hoped to be, a long career with a major mass merchant retail chain.

After working long hours and doing a lot of physical work, I learned what retail is all about….. the hard way. It formed a great understanding of what it means to be a merchant, and taught me some great rules to work by like, “Stack it high and Kiss it Goodbye” and “Measure twice, cut once”. Old school retail rules I know, but still relevant in retailing today.

Recently I sat down with a retailer who was struggling with profitability in their store. “I want to put my prices up” they said. Now to paint the picture, they are in a highly competitive discount environment with the major competitor a few doors down. Why did they want to increase prices? “We are not making enough profit and can’t cut expenses and overheads any further” they said.

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Too often we see the relationship between profit and price without also understanding their relationship with sales, and more importantly The Customer.

Ultimately your customer is not interested in how much profit you are making, and as such, the customer is only interested in what they are interested in.  Which could be many things, but doesn’t include your businesses success or failure.

Your job as a retailer, is to understand your customers’ needs and sell to those needs, and to understand retail trends and shopping habits. If you do this, you see an increase in shopping occasions and in return, an increase in sales. Price, availability and service are triggers to a sale and not a function of profit. If you can drive more customer shopping occasions, you can drive more sales; which in turn can lead to more profit and better economies of scale.

This doesn’t mean that you ignore profitability. Rather, understand that if you see more sales, then profit will come as a result.

It is also important that you look at Profit in the right way. Often I hear people wanting to increase their percentage profit; “I think we can make an extra 2% GP on this product”.  This may well be the case, however what is the impact on sales?

Perhaps a more effective method is to look at dollar profit instead of percentage profit. Dollar Profit can relate to sales volumes in a much more meaningful way. I am reminded of another old school retailing term from those early days, “you don’t bank percentages”.

Understanding how price elastic a product is, will help you to understand if changing price on a product will positively or negatively affect your dollar margin (my economics teacher would be so proud).

Coming back to the retailer that is struggling with their profit percentage. My advice to them is, to understand the impact of increasing price. What would happen to customer foot traffic, basket sizes, and transaction sizes, sales and profit dollars if they increase price?

Would you rather make 50c once or 20c three times? Yes I know… Old School!

Price competitiveness in their scenario, as well as some good, simple marketing execution could be just what they need to turn their profit around.

What do you need to do to increase profit in your business?

Contact us today to talk about how we can help your business grow.

Call us to find out more today!

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