Shop Talk: Practical answers for tough business questions
Question: I know you have talked about how to price merchandise in recent columns, but I still have another question, and I am not sure how to word it. I am confused because I hear I should mark up product that I can (items like jewelry that are not pre-priced) at a 2.5 or 3 times rate, but doesn’t that slow down my sales? Wouldn’t it be better to have a lower mark-up and sell more products? And how do I know how much of each sale has to go toward my operating expenses?
Answer: Your questions and points are valid. You may be getting tripped up in looking at individual items and not the overall picture. The big picture is every store has to cover cost of goods sold (COGS = price of merchandise) and overhead expenses (e.g., payroll, occupancy costs, insurance, etc.) to stay in business. So a store with a high sales volume, such as a grocery store, can spread the cost of overhead over a larger sales base. That helps reduce the mark-up required on each item. Usually, specialty retail stores have a smaller sales volume, so more of each sale would be needed to cover operating costs.
For instance, if your monthly overhead (operating costs after COGS are covered) is $10,000, and you have 800 sales per month (about 27 per day), then $12.50 from each sale is needed to cover overhead ($12.50 x 800 = $10,000). But, if you have the same overhead and 2,000 sales per month (about 67 per day), then only $5 per sale goes to cover overhead ($5 x 2,000 = $10,000).
Running a retail store is all about finding the balance. There will always be fast and slower moving inventory. Some items that turn rapidly (e.g., greeting cards) have a smaller mark-up, but they generate their share of gross profit by volume. More expensive or unique items, such as artwork or large stones, might not sell quickly but will contribute to the gross profit margin in a higher amount when they do sell. Merchandise such as jewelry hopefully is a fast seller and can sustain a higher mark-up, compensating for slower sellers or pre-priced, lower mark-up merchandise. Again, when we look at factors such as average sale and merchandise turns, we look at the overall store or larger departments within the store to incorporate all the different sales and cost parameters.
If marking up an item causes sales to slow down or stop, determine how important the item is to your product mix and be willing to either drop it or reduce the price. See if that increases the turn enough to justify keeping it on your shelves.
First published in Vol. 27 No. 1 of Retailing Insight. © 2013 Continuity Publishing Inc. All rights reserved.