The Practical Manager
In a recent Dilbert comic strip, the pointy-haired boss tells his staff, ?Don?t get all mathy on me.? While ignoring math may be easier on your brain, it is not a good thing for your business.
In this article, and in a seminar at Natural Products Expo East this month, I will give you some valuable information that will help ensure that you know your true costs, margins and profits—key items that will keep your business in the black. And I promise to do this without getting all ?mathy? on you.
The prequel to all of this is that you have to have good communication with your vendors—in writing. If you are working from a vendor?s published program, you should be in good shape, but any time you put together a deal or a program that is unique, you need to have it in writing. If there is disagreement later, a paper or e-mail trail gives you a clear opportunity to resolve it.
To understand the potential profitability of your business, you must understand your costs. What you are paying for a product is often not what is on the vendor?s price list. The two most common reasons for these discrepancies are discounts and freight.
Discounts: These generally fall into one of four categories:
- Introductory—When a product is just being introduced into the marketplace, or sometimes when a retailer picks up an existing product for the first time, there is an introductory discount on the product for the first month or two.
- Ongoing or Volume—A volume discount is given on all items purchased from a vendor. It gives a retailer reason to consider a vendor?s full line, whether purchased in large quantities or not. These discounts are usually negotiated, and can change based on the volume of purchases.
- Special Purchase—Some products have packaging or freight configurations that make specific quantities more economical for vendors. If a retailer purchases products in these quantities—a gross, a pallet, etc.—there may be a discount available. Usually these are incentives for a retailer to increase purchases to a specific quantity. Sometimes they are available only on specific quantities; other times, on purchases over a specific minimum.
- Time-Specific—This is when a product (or group of products) is ?on deal? for a month, quarter, while quantities last, etc. Many times these are listed on special order forms or deal sheets. Until recently, these marketing pieces would be mailed, included with an order or faxed. Nowadays, they might be e-mailed or posted on a special Web site.
Sometimes discounts can be ?stacked? or combined. Other times you only get one of them—usually, but not always, the largest of them.
If your vendor wants to add freight to the cost of your merchandise, be sure that you get a written estimate of the delivery charge, and then check to be sure that you are charged what you expected.
When it comes time to calculate your retail price, you need to consider both the cost of the merchandise and the cost of getting it to your back door.
Most products come with a suggested retail price, or SRP. It?s often thought of as MSRP—manufacturer?s suggested retail price, based on what the manufacturer knows about the overall market conditions and what you are paying for the product. Most of the time, it is a very valid suggestion. But manufacturers don?t know the particular market issues that you are facing in terms of competition, cost of doing business and customer expectations.
For the vast majority of items, SRP is a valid retail price to use. For marquee items in a brand, or for commodities in the marketplace, you should pay attention to what your competition is doing. Depending on your relative size in the marketplace, you may not be able to beat their price, but if you can keep it close, you will eliminate or minimize the business that you would lose if you stayed at SRP.
Margins vs. profits
Profit margins, usually just referred to as ?margins,? are a great way to measure the performance of products from similar categories of merchandise, but with different costs and/or retails. They give you confidence that your pricing is consistent from item to item. Margin is the percentage of the sale that you make on an item that is gross profit—profit that you make only when looking at the cost and retail, but not taking your other costs into account.
One use of margins is to review your inventory for just the margin exceptions—those that fall outside a range. If, for example, you target your margins on grocery items at 33 percent, you could choose to look at anything below 27 percent or over 38 percent. By focusing on the exceptions, you save a lot of time and go straight to prices that may need correction. (These could be items that are set outside of SRP.)
A couple of thoughts about high margins: You can?t take them to the bank. Margin is a great concept on paper, but if it doesn?t translate into profit on a sale, it isn?t worth a thing. Make sure you are buying good items, ones that your customers want and need. The vital next step is to make sure that they are priced right—low enough that your customers will buy them from you, but high enough so that you make money on the sale.
The value of numbers
A little while ago, my wife and I were dining with our son and daughter-in-law in a small, local Italian restaurant. On a wall of the restaurant, they had a poster of Italian proverbs. One of them caught my eye. It was, ?Arithmetic is not an option.? I agree. If you want to be a success, you have to do the math.
If you would like to learn more about this subject, I will be covering these topics and more at Natural Product Expo East in Washington, D.C., as part of the ?Retailing 101? educational program on Friday, Sept. 16 at 4:30 p.m. in Room 146B of the Washington Convention Center. I?m also leading ?Understanding and Obtaining Retail Co-op Dollars? on Saturday, Sept. 17 at 4:30 p.m. in Room 151B. I hope to see you there.
Bill Crawford, Director of Retail Publishing Programs at New Hope Natural Media, spent 12 years on the management team of a major natural products retail chain in the Southwest, primarily responsible for purchasing, marketing and category management. Bill has a master's degree in management and is on the adjunct faculty of three universities, where he teaches strategic management, human resource management and marketing. Contact him at [email protected]
Natural Foods Merchandiser volume XXVI/number 9/p. 36-37