Many retailers are suffering from an insidious ailment that is eating into their profits. It’s out of sight below the surface of the business, unless you know what you’re looking for! This garlic is margin erosion, which is simply a gradual reduction in your gross profit over time.

Margin erosion is gradual, much like natural erosion caused by winds and waves. Margin erosion is like a worm in an apple. You won’t notice it on the outside of the business: everything will seem to be in order: good sales, good customer numbers, etc. But it will slowly eat away at your profits from the inside out. It’s not until cash flow dries up that a retail store owner will begin to notice the effect this margin erosion has had on his business. Suddenly, it will be difficult for you to make ends meet: there will not be enough money to cover your expenses. Which can be disconcerting if everything on the outside seems fine. Fortunately, there is a cure for margin erosion!

Margin erosion, like any force, has certain conditions that suit it better than others. Under the right conditions, margin erosion can eat away at the life of a retail business from the inside out. What makes a company more susceptible to margin erosion?

  • Lack of Margin/GP Tracking
  • Faulty Pricing Strategies
  • Poor or non-existent expense management strategies.
  • Not ‘verifying’ the purchase price when receiving the products in the store
  • Excessive discounts or too much ‘selling’ activity
  • Bank fees/fulfillment costs/etc – Quite minor, but retail is a detail and every hundred counts!
  • Lack of efficient stock control/cancellation policies
  • Employee/customer theft
  • Inflation

So how do you check if you have a margin erosion problem and how do you fix it?

Once you know how to look at your business finances, you will quickly begin to identify the culprits that are allowing this insidious ailment to enter your business. You MUST track your gross profit (margin), daily, weekly, or at a minimum, monthly. Most current POS software should do this for you, but if not, there are still ways to control this (Retail Prosperity System has a section on how to measure this, I won’t go into detail here). If you are measuring your margin, you will be able to identify trends, and even if it is only down 0.5%, this will have a huge impact on your annual profit. By measuring your margin and keeping an eye on the trend, you will be able to see if margin erosion is working its way through your profits. If yes, then you need to identify the root cause of this and ruthlessly eliminate it!

A couple of the main causes of bank erosion are fairly simple to eradicate. Having an effective pricing strategy is perhaps the most important of them. In fact, your pricing strategy is one of the key components of your retail success. Two FAULTY pricing strategies are:

  • Stick to the MSRP – Many retailers are terrified of deviating from this figure, but don’t even understand how the supplier came up with that figure! Meeting the RRP is a sure way to erode your margin.
  • Apply a general/universal markup. It amazes me how often I see this: cost + 40% or cost + 100%, whatever the number, many retailers still use an arbitrary price gouging method to price their products. Not only is this a lazy pricing method, but it goes against what retailing is all about: BUY the best you can, SELL for as much as you can, while maintaining healthy turnover.

If your retail business is using one of these strategies, talk to me or buy the Retail Prosperity System – it covers this topic in detail and describes the same pricing strategy I use in retail (and unlike many so-called retail experts) . , I have my own very successful retail business!)

Another vital cause that is very easy to prevent is simply checking purchase prices. Most providers ‘reserve the right to change prices’ whenever they wish. And you will be surprised how often they do this without informing you! Every time you receive products, check that the purchase price is the same as before. If it has increased, even by 1-2%, then you have a problem – call your provider and ask for an explanation!

If you want to profit, and make good profits, from retail, you have to watch out for margin erosion. There are many causes, but in the vast majority of cases, the cure is simple and will cost you nothing more than a little time. Sure, time is a precious commodity in retail – we all know the retailer’s curse: the half-drunk cup of coffee! But put in time, it could be the most valuable investment you’ll ever make in your business!

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