Merchandising: The 8 P’s to Profitability (Part 2)
As a business owner, your job is to turn a profit and we do this by calculating the amount of income or revenue above and beyond the costs or expenses a company incurs. It is calculated as total revenue minus total expenses. And no matter the size of the business, nor the industry, profit is the goal.
There are many factors that go into determining overall profitability. Some are hard costs such as product sales and cost, others are soft costs such as the culture within your business.
Let’s tackle a couple of each now.
In part 1 of The 8 P’s to Profitability we introduced the 8 P’s:
And we covered the first 3, People, Product and Placement. Here in Part 2, we’ll cover the remainder.
Price – this goes far beyond just the actual price tag. Pricing is a science, but one that you can learn with experience. Let's look at the High/Low pricing strategy, this is all about perceived value. Who doesn’t love a sale?
This involves setting prices high when a product is first released and decreasing the price later in a series of sales events or item markdowns. High-low pricing is extremely common in retail and is perfect for your seasonal items.
Driven mainly by the fashion apparel world, this strategy has been adopted by multiple categories. Here’s how it works: At the start of a season, new items are introduced at full price. Items that appear to be not moving quickly enough, may be marked down. As the season progresses, you may choose to run a series of sales events to markdown all inventory in an effort to boost your revenue. The goal for seasonal items is to get in and get out, making room for the next batch of items.
The key here is to move swiftly. Do not be afraid to markdown slow movers. Stale inventory does not help your profitability one bit.
While we’re on the topic of inventory, lets talk turns. Inventory is probably your biggest expense and needs to be turned over frequently in order to generate cash flow, and we all know that cash is king. How frequently is relative but an inventory that turns 4+ times a year is deemed healthy.
To calculate your inventory turns use this formula:
Inventory Turnover = Cost of Goods Sold / Average Inventory for the Period.
Some would say that the higher the turns, the more profitable you are, but you have to be careful, if you turn too fast, you’re probably missing out on lost sales due to out-of-stocks.
Promotion – When we hear promotion, we think "sale", but it goes much deeper. Promotion is tightly woven with placement as we discussed in Part 1. You want to strategically cluster clearance items together and direct your customers there with bright signage that is clearly marked.
When calculating savings always use the higher number. For instance; if an item was $25 and you’ve marked it to $20. This is a $5 savings, but it is a 20% savings as well. Mark this as 20% off as it gives a higher perceived saving. Always have the savings clearly called out, do not make your customer do the math. You want to get full value for your promotions so follow these steps to ensure success.
The word ‘markdown’, while not a 4-letter word, it definitely makes retailers cringe. When we hear markdown, we think profit/margin loss, but this doesn’t have to be the case if you have a proper markdown strategy in place.
What is a markdown strategy?
Instead of slashing prices at the end of a season to get rid of your unwanted goods, you can determine upfront which items you’re willing to reduce prices on and by how much. Taking a proactive approach will allow you to better lifecycle manage your inventory and increase cash flow. This also helps you to monitor the product’s rate of sale and adjust pricing accordingly.
Learn micro-seasons, (4th of July, Back-to-School, Hunting Season, Thanksgiving, Christmas etc) utilize seasonal items so you can capitalize on a bigger ticket average with supplemental selling.
Lastly, utilize technology and social selling to promote your brand, places like Facebook Marketplace, Instagram and Google are great resources for driving traffic to your store.
Presentation – Traditional merchandising is everything you do to promote and sell your products once the potential customer is in your store, and sales generally begin with your eyes. You only get one chance to make a first impression. How you present your brand is how your customers will treat it.