Watching industry norms and testing customer resistance to higher pricing produces a healthier operation.
Maintaining your margins can feel a lot like walking a tightrope. You have little room to move either way and getting it wrong altogether can lead to a very painful fall!
In simple terms, there is no single margin solution for everyone. If you pitch yourself as a high-end business, then you can expect lower stock turn and will need a compensating higher margin to make up for it. If you are appealing to the masses, then a lower margin/high volume approach is the strategy that might work best.
That said, comparing margins to your peers is still a worthwhile exercise. You don’t need to worry if you’re achieving more than the industry norm, but you should certainly take notice if you are achieving less. This is money that’s being left on the table.
So what margin is “right”? The simple answer is it’s the one that yields you the best return on investment, the most dollars of profit for every dollar invested. Everyone knows that an increase in prices will lead to buyer resistance at some point. The question is, does the extra profit achieved from pushing beyond this point make up for the fall in sales volume? What is a customer’s level of resistance?
We are seeing an increasing level of discounting, not only from online retailers but also from your fellow brick-and-mortar store owners. Margins have dropped in the last couple of years on the back of a growth in average retail sales being achieved. The perception is a high-priced item must sell for lower margin than a cheaper one.
Back in 2011, jewelers were achieving between 50 and 52 percent margin — that’s over $1 of profit for every dollar invested in inventory. That figure has now dropped to between 45 and 47 percent — only 90-94 cents in profit for every dollar invested. Yes, there has been a move toward higher priced product, but if a jeweler has the same level of investment in product in 2017 as they had in 2011, they will need to increase the volume of stock turn by around 10-20 percent to earn the same return on their inventory investment. With higher priced items, this is less likely to happen.
Many store owners will have to increase their investment in inventory to achieve the same level of profit, or achieve a drop in operating costs (e.g., less staff) to help make up the difference. Given that the sale of a $10,000 ring doesn’t take 100 times the effort of a $100 silver bracelet, then reducing staff is a realistic option, but if overheads stay the same, then the drop in margin will begin to bite.
What is the ideal margin? There is no one figure, but a combination of monitoring what your peers are achieving, testing your customers’ willingness to pay, determining what market you are aiming for and looking to maximize the return on your best-selling items will help you set your prices in a more conscious and profitable fashion.
This article originally appeared in the May 2017 edition of INSTORE.
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