10 operational strategies that lead to higher retail profit margins
Because better control over your business equals more money for you
A good profit margin for retail is 10–15%.
Yet, many retailers struggle to achieve this.
In this article, I will share 10 innovative and inexpensive operational strategies that result in higher retail profit margins.
1. Increase the perceived value of your products
When customers believe that what you are selling is more valuable than what your competitor is selling, they become willing to pay higher prices.
You can increase the perceived value of your products in various ways, including by providing exceptional customer service, offering warranties or guarantees, and by packaging or displaying the products in an attractive and appealing way.
Examples:
- A clothing retailer can increase the perceived value of their products by offering a free alteration service for any clothing that customers buy in their store.
- A grocery retailer can increase the perceived value of their merchandise by offering free delivery on orders over a certain amount.
2. Reduce operating expenses
Operating expenses can eat profits.
You can reduce your operating expenses by negotiating better deals with suppliers, reducing energy consumption, and by streamlining operations.
Lower costs = higher profits.
Examples:
- A clothing retailer can reduce operating expenses by sourcing fabrics from local suppliers at a lower cost, which will reduce the cost of transportation.
- An electronics retailer can reduce operating expenses by installing energy-efficient lighting in their stores, which will lower energy bills.
3. Increase prices
Many businesses are afraid to increase prices because they believe their customers will abandon them.
But there are ways to go about this.
You can increase prices by improving the quality of your products, by offering unique products or services that distinguish you from your competitors, and by creating a strong brand.
Examples:
- A clothing retailer might increase prices by sourcing fabrics of higher quality and promoting them as luxury goods.
- A grocery retailer might increase prices by offering a wider range of organic products, which are often more expensive than non-organic products.
4. Reduce markdowns
If you hold on to products for too long, you may be forced to reduce the price to sell it. This is called a markdown.
You can reduce markdowns by being more strategic about your purchasing and making sure that you only buy what the customer actually wants.
You can also reduce markdowns by reducing the amount of inventory you hold.
Examples:
- A furniture retailer can reduce markdowns by conducting regular sales analysis and inventory management to ensure they are not overstocked on any particular item.
- A beauty retailer can reduce markdowns by using business data to identify what the products that are not selling well and adjust their purchasing accordingly.
5. Smart discounts
If you have a smart discount strategy, giving discounts can actually help you increase sales and profits.
Having a smart discount strategy means that you don’t just give discounts to all customers.
Instead, consider using loyalty discounts for customers who keep coming back, volume discounts for large purchases, and targeted discounts for specific types of customers.
Examples:
- A furniture retailer can increase profits by offering volume discounts to builders and developers who purchase furniture in bulk.
- A beauty retailer can increase profits by offering targeted discounts to encourage customer retention, like a discount code for their next purchase.
6. Expand to e-commerce
Adding e-commerce can be a good way to increase your profits.
It can help you reach more potential customes, reduce expenses, and increase sales.
Examples:
- A clothing retailer might expand to e-commerce by putting their products on Amazon or Alibaba and start promoting their products through social media.
- An electronics retailer might expand to e-commerce by launching an online store that offer deals and discounts that are not available in physical stores.
7. Optimise your product mix
You can increase your profits if you optimise your product mix.
This will require you to identify your most profitable products.
When you have done so, focus your marketing on selling more of these products. At the same time, eliminate or reduce the products that are not selling well.
Examples:
- A grocery retailer can optimise their product mix by conducting regular sales analysis and inventory management to identify the most profitable products.
- A furniture retailer can optimise their product mix by eliminating lower-selling items and focus on promoting their best-selling products.
8. Focus on customer service
Satisfied customers are one of the best strategies that result in higher retail profit margins.
Choose to offer excellent customer service.
Some ways to do this are by hiring and training staff to be friendly and knowledgeable, creating a welcoming and comfortable shopping environment, and by surprising your customers in a good way.
Examples:
- A clothing retailer can improve customer service by creating a welcoming shopping environment by using particular colours and designs.
- A beauty retailer might focus on customer service by offering free makeovers and surprising registered customers with gifts on their birthdays.
9. Use your business data
Your business gives you a huge amount of information that you can use to improve profit margins.
Use this data to make data-driven decisions in your business.
You can start tracking sales data, customer behaviour, as well as market trends.
Examples:
- A furniture retailer can use their sales data and customer behavior to identify the best-selling products and the most profitable customers.
- A grocery retailer can analyse market trends to identify new products that will likely be popular with customers.
10. Leverage the power of social media
Retailers can leverage the power of social media to connect with customers, increase brand awareness, and drive sales.
This can be done by creating a strong social media presence, engaging with customers through comments, reviews, and social media contests.
But note that it will take some time before you see higher retail profit margins with this strategy.
Examples:
- A clothing retailer can leverage the power of social media by creating a strong social media presence on Instagram and Facebook, and by running social media contests to engage customers and drive sales.
- An electronics retailer can leverage social media by creating a chatbot that can answer customer queries on social media platforms, reduce the load on customer service and drive sales.
Conclusion
There are various strategies that result in a higher retail profit margin and long-term success for your business.
However, they need to be approached with care and tailored to local context to ensure that they work well for your business and your market.
Meaning: you need to test, experiment and adjust.
By understanding these strategies and finding ways to implement them, you too can see higher retail profit margins in your business.
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Hi, I’m Tonia Dabwe, founder & director of GuideMyGrowth.com. At Guide My Growth, I help small and medium businesses generate higher profits so that they can grow faster without having to depend on outside funding. This article was originally published on Guide My Growth.
