Change for more profits: Increase margin vs. improve performance on traffic
May is the month where retailers are entering into that period of discounted prices. Although all retailers dream of selling 100% of their inventory at 100% retail price, we all know this is a fantasy. So when the time comes to discount prices, how far should you go? Or, how far do you have to go to liquidate your inventory after this short spring season? You know it all depends on the overall performance during the «full price» season.
Most definitely, retailers must concentrate on improving their margin, especially when traffic is down, when the investment made in inventory is high, and when both the weather and the economy are more and more difficult to forecast. These all make it challenging to achieve sales objectives with a reasonable margin.
Apart from new buying strategies to improve margin, strategies to reduce promotions will certainly impact store traffic and therefore sales revenues. To offset the impact of the lost in customer traffic, the increase in the gross margin has to compensate the sales. In table 1, here is an example of possible impact on profit by improving margin when customer traffic is down.
(Assuming all other expenses remain the same as well as the sales performance on traffic: a 10% conversion rate and an average sale of $100).
As an alternative to improve the margin, a possible strategy is to improve the performance on traffic already in the store. Using the same example, in table 2, here is the possible impact on profit by improving the performance on traffic while the margin remains the same. (Conversion rate varies while the average sale remains at $100)
At Axper, we believe that all strategies implemented to improve profitability have to be closely evaluated for the chance of delivering the expected results. The suggested alternative of improving sales performance on traffic already in the store deserves much greater attention and evaluation from top executives. The expertise and the performing tools are now available to assist retailers in insuring the success of the above strategy for improving net profit:
Change for more profits.
What is your situation?
Fill in table 3 below with your own data to find out the results of your strategies on profits. Once you have completed your «Actual», you are invited to work with both scenarios, #1 by increasing your margin % and #2 by increasing your conversion rate, and see which one has a greater impact on your profits. Perhaps it is a combination of both.