Let’s look at what makes a retailer profits.
It’s just a few main things…
Number of stock turns in a year, Gross Margin or pricing strategy, How many staff you have working relative to turnover, Rent proportional to turnover or revenue, Conversion rate of walk in traffic to purchases
Let’s investigate all 5.
Stock turns per year, from years of working with retailers, is something a lot of the shop keepers don’t know. Work it out if you don’t know by looking at how many times the cost price of your stock divides into your turnover in 12 months.
e.g. If your stock was valued at $50,000 and you turned over $150,000 your number of stock turns would be 3. If your gross margin was 50% you would make $150,000 gross profit as well.
Stock turns gives you profit, so therefore the more stock turns you do the greater the profit, this is important for you to remember.
In retail you want as many stock turns as possible. But what affects stock turns is what we need to look at.
Stock turns is affected by price and conversion rate (or selling skills). If your prices are much higher than your competitors this may (but not necessarily) affect your sales and hence stock turns.
Conversion rates play a massive role in making profit. If you get 20 people a day walk into your shop but only 2 buy you won’t be making much profit. How you approach customers is extremely critical as you can lose any chance of a sale by uttering just 4 words.
I hope you don’t take offense, but I am going to tell you the worst 4 words you can say…
Can I help you?
Every person has hear this a 1000 times so their reflex reply is virtually always… no thanks, just looking!
So I suggest you say to people – Hi, have you been into our store before – or something similar. If you have a lot of repeat business with people coming back very regularly I would recommend you say – Hi there, how long since you’ve been into our store?
Either question has to elicit a yes or no answer. Either one is great as you can follow it up with – Really. Let me show you around!
This is so simple, yet so powerful. I worked with one retailer who used this first line and with a bit more help and fine tuning he achieved a 100% success rate for a whole week! Yes, every person who walked in bought something. Prior to this sales system he was getting about 62% of walk in people buying.
So try it out for yourself, let me know how you go with it.
So let’s look at how to increase stock turns, apart from the most powerful one, which is always sales training by using a different greeting…
To increase stock turns you must find out what’s selling and what isn’t. You must measure to find out. Whatever stock has been in your store too long (which could be 3 months) you need to get rid of. In other words sale it off.
I never recommend discounting by a percentage. This can be fatal! I suggest you mark down the price with a tag that says – Was $X, now $Y, save $Z. This works great. Or, just cross out one price and put the new lower price.
Or you can put all stock you want to sell in a special place and tell customers if they buy something else in the shop for ($X) they can have anything in the special place for half price.
The reason you MUST sale off old stock is due to opportunity cost. In retail you need to divide the whole floor up into squares then look at what is selling in each square. It’s all about return on investment from rent paid. You must make a profit from every square in your business, so whatever occupies a square must be selling every 3 months or so.
Whatever isn’t selling in a square is costing you money, lost money from having something in the square that could be selling.
This is called retail knowledge and comes with years of experience in your industry. Finding out what sells best with good margins is what retail profits are all about.
Most retailers I have met say it’s too much work to measure stock levels every 3 months, so they do it once a year because they are too busy. Busy-ness has nothing to do with profits. Busy people go bankrupt from business ownership every day.
Let’s look at the next point. Your pricing strategy or margins.
I meet retailers all the time who don’t know their gross margin or profit. When I ask them what their gross margin is they typically tell me 150% to which I reply you can’t have over 100% profit. Unfortunately retailers mark up by a percentage, they don’t often work on gross margin.
Gross margin gives you gross profit and gross profit is what pays the rent and overheads, not mark up. That’s why it’s more important to know margin. So ask your accountant to work it out if you don’t know how. I don’t have much space here to explain it.
Here’s out last point to cover, how many staff you have working relative to turnover.
This isn’t a simple cut and dried answer. This takes careful measuring from history to decide on the future.
This is where additional marketing can be extremely profitable, yet few retailers do it effectively. If you design and run a newspaper ad, make sure you have an offer on it so it makes it easier to track responses, sales and profits from sales to know if your ad worked or not. This is crucial!
Don’t assume your ad works as I have found 98% of all newspaper ads do not make even $1 profit enough to pay for the ad from the profit from the sales, which to me is the only measure of a successful ad. It takes great expertise to make good profits from newspaper ads.
When you have a turn-key system to generate sales, it makes it so much easier to plan staffing needs.
In regards to rent to turnover I have met business owners who are paying 32% of their turnover as rent and wondering why they can’t make enough profit to even pay themselves. So get hold of some benchmark numbers for your industry, look on the web or ask your accountant and see how your rent compares to your turnover for your industry.
One final tip… have each of your staff measure their own conversion rates, from walk in to paying customer as a percentage. This will automatically increase, just by measuring it! A very powerful thing to do.
Put all these tips together, including changing how you greet customers, measure what sells and what doesn’t, monitoring marketing returns, watching staff numbers and selling off items that haven’t sold in a needed time frame, all will add up to BIG profit increase. And that’s what you’re in business to achieve isn’t it?
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