By
Bob Phibbs
Updated April 18, 2024. Retailers’ profit margins have been more relevant than ever lately ...
It all started with curbside pickup, the only way many stores could sell their products during the pandemic.
Now, some experts are suggesting retailers add similar programs:
- “You should really offer social shopping.”
- “Why don’t you ship and return for free?”
- “Can’t you deliver to trunk like Amazon?”
This advice is well-intentioned but misinformed.
Suppose you have the same resources as Amazon, Walmart, or Target. Great! Add as many bells and whistles to your retail sales strategy as possible.
But if you’re anything like the retailers I know, you don’t have unlimited capital from stockholders. And programs like these take funding — additional costs you’ll have to compensate for elsewhere.
The truth is that improving your retailers’ profit margin is a two-step process:
Step 1: Know your average profit margin (and a good margin to shoot for.) Don’t worry. I’ll make this process easy for you, even if you’re not a “numbers person.”
Step 2: Implement my 15 proven ways to increase your retail profit margin — no complicated programs or freebies required.
Ready to get started? Good. Let’s dive in.
What is retail margin?
“If you don’t know your numbers, you don’t know your business.” – Marcus Lemonis
So, what is retail margin?
If you’re an accounting whiz, feel free to skip ahead. For the rest of us who could use a quick refresher on some bookkeeping fundamentals, here are the numbers you need to grow your business:
Gross retail profit margin is the percentage of revenue after deducting the cost of goods sold. It doesn’t account for additional operating expenses — that’s net profit.
Your retail margin is a snapshot of your business’ general health. Plus, it shows how much revenue is flowing to your bottom line.
If you don’t know your average retail profit margin, set up a meeting with your accountant or bookkeeper. Ask about operating expenses, variable costs, and cash flow, too.
To get a general idea of your gross retail profit margin yourself, here’s the formula:
Gross Profit Margin [%] = {(Total Revenue - Costs of Goods Sold) / Total Revenue} x 100
Here’s a simple example:
Say you buy something for $1. You resell it for $2. What’s your gross profit margin?
I’ll give you a sec.
Did you get 50%? Well done — that’s your retail profit margin for that item.
Many retailers aren’t going to see a 50% gross profit margin. That’s okay. So, what is a good benchmark for retailers’ profit margins? Let’s take a look.
What is a good profit margin for retail?
According to Lightspeed, the average gross retail profit margin is 53.33% worldwide.
That percentage doesn’t tell the whole story, though ...
Average retail profit margins vary by industry. A luxury jewelry store and a neighborhood grocer simply will not have the same average margins.
Here’s a look at some profit margin averages based on industry:
- Supermarkets, wine, and liquor retailers: 26 - 29%
- Women’s clothing shops: 47%
- Furniture stores: 45%
- Baked goods: 57%
- Sport supply stores: 39%
These percentages are just snapshots of the industry averages. Selling low-profit margin products successfully is possible if you follow the 15 tips I reveal below.
To improve your profit margins, start by regularly reviewing your numbers. It’s much easier to arrive at your goal destination if you know where you’re starting from.
Here are 15 ways to increase profit margins for retailers
You’ve chatted with your accountant and understand your current retail profit margin. You’ve also looked at the average retail margin for your industry, and you’ve got a reasonable profit goal in mind.
Now, let’s get you to where you want to be. Here’s how to increase profit margins today.
1. Increase prices
You don’t have to increase prices across the board. Instead, selectively raise the cost of your most popular items. You’ll also effectively add to your bottom line and improve profit margins.
If you’re a small business owner, remember this: your customers don’t know your cost of goods. They also purchase from you for the shopping experience; the product is just a souvenir.
Pro tip: Are you one of the lucky retailers slammed with revenge-buying customers? Scarcity gives you cover to raise your prices (if you have the merchandise.) Don’t be afraid to do so.
2. Narrow your focus
You can’t be all things to all people — nor should you try.
Have you ever dined at a restaurant with a menu like a novel? There might be 200 dishes, but they’re all mediocre at best. If you’re like me, you would much prefer a restaurant with only 12 dishes, each of which is outstanding.
During the pandemic, Wegmans cut 40% of their SKUs to avoid out-of-stocks on staples.
Consider how much profit you’re earning on slower-moving items. Could you devote that shelf space to quicker-moving, more profitable items? Yes!
3. Limit the discounting
Turning to discounts is tempting when you need to make a sale. But without a plan, markdowns rob you of earnings and won’t increase retailers’ profit margins.
Let me tell you about a toy store owner I know. Whenever bills are due, she hops on Twitter to give her followers a same-day 30% discount. She thought it was brilliant. Only it wasn’t.
What this retailer didn’t realize is this:
This store owner was robbing herself of her retail ROI. Sure, she paid her bills on time. But she also implemented a defensive selling approach that taught her customers not to purchase full-price — that waiting for the next Tweet announcing another discount is better.
Discounts can work, but sparingly. A quarterly promotions schedule is a good idea, and the discounting should be limited.
4. Cut waste
Are you hiring out for jobs your current staff could do?
Take the window washer. Store cleanliness is essential, but must you pay someone extra to do this task?
Get more done with who you have, even if you’re not at full staffing yet. Your retail profit margins will thank you.
5. Schedule retail employees to need
Do you have three employees opening when you only need two? Are you understaffed every Saturday when you know you’re always slammed?
Ensure your employees’ schedules best fit your store’s needs. Save money where you can, but don’t risk losing customers to the competition due to poor service.
Pro tip: With more people working from home, the conventional thinking that Saturday is the busiest shopping day isn’t always true. Use your numbers to inform your scheduling.
6. No overtime — period
I’m not saying you should take advantage of your retail sales employees.
However, don’t let high-cost hourly managers fill in for entry-level or hourly employees. If something comes up, use salaried staff instead.
7. Don’t schedule for the convenience of your employees
Want to know a managerial skill that will improve profit margins, too? If you only need your employee Vance for four hours, schedule him for four hours (even if he would prefer to work eight.)
Also, consider staggering shifts. You’ve got to keep your doors open to improve profit margins.
8. Award extra hours based on merit
Grant employee requests for more hours based on their average sales (or the number of units per customer sold.)
I know you want to be a nice boss, but it’s better to reward the retail associate helping you sell merchandise than to say yes to each and every staff request.
9. Personally hand out all paychecks
The cost becomes real when you see how much each staff member takes home.
However, don’t just pass out checks. Say thank you and show gratitude where it’s due.
10. Give bonuses when deserved
Pay bonuses proportionate to profit, not total sales numbers. Otherwise, you might be rewarding an Expressive or Driver salesperson — two personality types that utilize discounts to make sales, robbing you of profit.
11. Look for theft by matching inventory to sales
A full-featured POS system makes it easy to track what came in the back and went out the front — and what went missing in between.
If you don’t have the software, there are workarounds. For example, a restaurant franchise I know audits internal theft by matching the number of cups received to the number of drinks ordered.
12. Cut vendors
You’ll often get better pricing, shipping, and dating deals when you buy more from fewer vendors.
Ordering only a few items from multiple vendors requires more bookkeeping and tracking, plus you’ll pay top-dollar trying to meet each minimum order.
Even with the unknowns in merchandise forecasting, no one item is so special that it requires countless vendors. Simplifying your orders is an easy way to improve any retailer’s profit margins.
13. Combine your orders
Are other dealers purchasing similar items from the same vendors?
Combine orders to get freight and larger-order discounts. Clarify who is paying what early, then pay before delivery to avoid complications.
14. Sell added value by bundling products and services
Your customers value their time. So, they’ll pay for valuable services related to your products.
Take Best Buy’s Geek Squad. They promise to fix any computer problem — anytime, anywhere. Of course, they leave off “for a price.”
People don’t want the hassle of figuring things out themselves. And they don’t want to screw things up. Selling added value is the way to a very profitable future.
15. Fire unprofitable customers
Every retail business has that customer:
The one who needs all the hand-holding. Who beats you up on price and constantly calls you with time-consuming problems ...
If your company is large enough, ask your order desk or sales rep to provide the top 10 complainers. Then, match them to the number of profitable orders they generate.
Even if they deliver large volumes to your business, they must pass the profit test. If they don’t, tell them this:
“While I appreciate your business, the cost to manage your account outweighs the profitability. Therefore, we must implement an appropriate price increase.”
How to increase retailers’ profit margins: the bottom line
Most retailers evaluate operating profit margin a few times a year:
- After a complete physical inventory to see how much money was on the sales floor
- During the first quarter after the holiday dust has settled
- Around tax time with a current profit and loss statement
But if you’re serious about increasing profit margins, any time is an excellent time to review your numbers.
Improved retail profit margins don’t just come from discounts or cutting staff. Instead, limit unnecessary costs while increasing the number of items sold at the right price. That goes for expensive products, too.
Start using these 15 tips today, but be sure to train your staff and improve your customer shopping experience. You’ll be in business for years to come.
Ready to take the next step?
