When you run a business, one important financial metric you have to be familiar with is the retail margin. The retail margin is also known as the gross margin and measures the relationship between the costs you pay and the price you charge your customers.
Managing your margins plays a major impact on the profit or losses you make.
Common sense dictates that the margin you choose should be neither too high nor too low to attract the most customers and generate the greatest amount of profit. Your margin also needs to cover the cost of doing business. This is where understanding the basics of “mark-ups” and “gross margins” can help.
To get a very rough idea of how you need to price your products to meet your financial goals, start with your income statement, and calculate the following for an average month:
- Calculate your average operating expenses
- Calculate your average cost of goods sold
- Decide on your desired gross profit from the business
- Calculate your target gross sales by adding all three of the above figures together
Once you have done this activity you will have figured out how much money the business needs to earn each month for you to reach your financial goals. The next trick is to figure out how to price your products with the correct margins to reach the desired gross sales figure.
While discounting may reduce your average percentage margin for part of your range, the increase in sales may increase your dollar margin. The art of good retailing is to balance these positions in a manner that leads to the desired outcome without compromising your required dollar margin. By proactively managing your discounts, you will avoid average margins being below plan. Accordingly, do not get too hung up on protecting margins irrationally when the end of season is approaching. It is important to bite the bullet and make attractive sale offers. Hanging on to dead stock is unlikely to be more attractive to buyers in subsequent weeks.
The best retailers will always focus on sales, margins, and closing stock positions.