Revenue and profit are key metrics for most businesses, and retail is no different. And if you’ve been in business for a while, whether in retail or another industry, you might know that the metric you should key your eye on (and try to manipulate) is your profit margin. But how can retailers, specifically, increase their profit margins?
Most small businesses struggle to see a profit, especially in their first few years of life—and as a retailer, you understand how quickly operational costs and erratic buyer behavior eat away at your revenue. As a result, your profit margins might be suffering.
Know that a low profit margin doesn’t necessarily indicate bad business practices, though—it simply means you have to generate more revenue to break even. Depending on the choices you make about pricing and markup, you might have to sell a high volume to turn a profit. For context, online retail giant Amazon consistently nets profits less than 2%.
Although Amazon’s pricing strategy and ultra-low margins aren’t feasible for most small business owners, independent retailers can definitely incorporate big-business tactics for increasing profit margins. Let’s get to it.
What Is Your Profit Margin?
Profit margin is a factor of sales and spending. Selling more inventory is probably the most obvious way to increase profits, but it’s important to understand that an increase in revenue is not exactly the same as increase in profit. An increase in sales will drive revenue up—but if your spending on inventory or operating costs increase proportionately, you won’t see an increase in profits.
There are a few profit margin variants—the standard net profit margin or net margin is a profitability ratio of net profit to your revenue, expressed as the percentage of each dollar of revenue that you keep as earnings. Different ratios can present different views of your company’s financial health—a profitability ratio calculator or other online tools make crunching the numbers easier.
It’s also important to distinguish between ratios if you choose to do more than one. In short: operating profit margin is your percentage earned per dollar sold, minus costs, but before taxes, as opposed to gross profit margin, which is the ratio of revenue left over after the price of goods sold is deducted.
Basically, the relationship between revenue and costs of operation is represented as a percentage, the profit margin. This ratio determines how much revenue you actually see, after you’ve covered all your essential expenses. In more generalized terms, it indicates your business’s financial health.
How to Determine Your Profit Margin
Before you dive into calculating your profit margins, you’ll need to do some prep work to make sure your numbers are accurate. First, make a thorough assessment of your operational costs and evaluate your inventory.
As you survey your costs, there’s a good chance that you’ll immediately notice an area you can improve on, even before you plug in your numbers. For instance, you might be paying for electricity and air conditioning during closed hours, or consistently over-ordering on certain products. Taking care of operational waste will help you focus your efforts, and really hone in on where you can increase profits.
Then, as a starting point, you can look up the average profit margin for the retail sector—that can help you assess where your business stands, relative to other retailers. Ultimately, though, industry averages tell you very little about your individual business.
To know how to increase your profit margin, you need to know where it stands now. To determine what a good profit margin is for your business, start by looking at the revenue generated by sales, and how you’re spending that revenue before you see a profit.
5 Ways to Increase Your Profit Margins as a Retailer
We talked directly to five fellow retailers about their creative tactics for increasing their profit margins. These are proven methods that have worked for boosting their bottom lines.
1. Take your brick-and-mortar store online.
Give shoppers more opportunities to engage with your business—wherever they are. Not all retail businesses are compatible with ecommerce, but it’s crucial that customers can find you online. Even if you choose not to make your website shoppable, try to highlight your inventory and offerings.
Your website can evolve as you do, so you don’t have to do everything at once. For instance, if your goal is to have a full ecommerce storefront, simply start by creating a website if you aren’t already online. From there, work on putting more inventory on display as you have the time and resources.
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A bare-bones (but stylish) website with your business name, location, and contact information will at the very least ensure that people looking for your business can find you.
Plus, in addition to increasing exposure, an online storefront can drive revenue without the costs of opening a second location. For instance, trendy handbag and leather goods company Hobo Bags began as a wholesale line, adding to direct-to-consumer shopping, and last year launched an online storefront. Within a year of opening for business online, Hobo boosted revenue 62%.
Adding an online presence increases entry points to your business, and cross-platform engagement (aka online and in-store) can also help improve conversion rates—all without draining your revenue.
2. Plan ahead and strategize seasonally.
Most retail businesses have a peak month or season for sales. Typically, peaks vary based on the retail sector and your location, but most U.S. retailers can expect to experience some fluctuation in sales each month. If you’ve been in business for a year or more, you probably have an idea of traffic and sales fluctuations month-to-month—if you notice distinct patterns, try to incorporate what you learn as you plan ahead for the coming year.
Mark Aselstine, owner of Uncorked Ventures, uses these patterns to optimize inventory for his wine subscription service. He notes that planning ahead for seasonal demand might even score you a bulk deal on products. He says:
I’ve started to plan ahead when the holidays hit. We get a number of 3- and 6-month gift subscriptions around that time, and wine is cheaper when bought in bulk. So, I not only buy wine for those gift subscriptions all at once but also try to include wine for upcoming wine club shipments. Without a doubt, it takes some planning—in some cases, we’re buying February’s wine in December. But if done well, it can bring the price of the wine we purchase for ongoing wine club members down from about two-thirds of retail, to 50%.
Keep in mind that your capacity to purchase and store extra inventory depends on your available space and the cost of your inventory. Especially if you have an annual subscription service or frequent repeat purchases, it’s worth finding out if suppliers in your network offer discounts for bulk or advanced orders.
3. Target high-intent shoppers through email.
Connecting with customers via email, whether it’s to resurface specific products or feature sales and deals, can work for everyone from small boutiques to multibillion dollar retailers. But the key to a successful (read: nondisruptive) email campaign is to get your customers’ consent before flooding their inboxes.
A pretty straightforward way to put your inventory in front of high-intent customers is to offer “Out of Stock” emails, which notify a customer when an item they’re interested in is back in stock. You can offer this service to customers in-store, even if you don’t have an online storefront.
Antonella Pisani owns a small business called FACT Goods as well as an ecommerce consulting firm. Prior to owning her own businesses, Pisani held leadership positions in major US retailers, becoming an expert at ecommerce and marketing strategies. She says:
One way to increase profit margins is to focus on inexpensive acquisition and retention tactics. Examples of low-cost tactics include everything from organic search (SEO), to cart abandonment emails, to putting a postcard into your shipping box with an offer redeemable in the next 30 days.
If you’re looking for a starting point for your email campaign, put an email sign-up sheet in your brick-and-mortar store or online storefront. Email announcements for sales and promotions might help get customers in the door, which is especially relevant if you have a business where shoppers tend to purchase more than one item. You can get the psychological benefits of a sale, all without totally compromising profit.
Again, make sure to specify that customers are signing up for news and promotions from your business. So, for instance, don’t ask for an email to send a receipt and later use that email address for marketing purposes without opt-in consent.
4. Get creative with inventory.
Examining your inventory once a quarter is a great way to start tracking demand and turnover on specific products, which might help you adjust how you purchase in the future.
Small Shop is a U.K.-based retailer selling plant-based, reusable products for home and travel, aiming to reduce waste generated by single-use, disposable plastic. Owner Emma Frame Street holds her inventory to high sustainability standards, and implements environmentally conscious practices and products in all aspects of her business. Everything is biodegradable and ethically sourced, like packing tape and suppliers, respectively; if you have specialty inventory, then you know how important quality is, and how expensive.
Making a few small habit changes can drastically reduce your waste. Bring your own produce bags to the market and eliminate waste from produce bags. Bring your own tote and skip the carrier bag. Carry a water bottle with you and say no to plastic water bottles. Bring your reusable coffee cup to the cafe and skip the disposable one. Throw your reusable cutlery in your bag and you’ll never have to use a plastic fork again. Being prepared can go a long way to limiting your environmental impact. . . . . . . . . . . #zerowaste #zerowastelife #zerowastelifestyle #zerowasteliving #zerowastehome #reducewhatyouproduce #buylesschoosewell #circulareconomy #nowaste #consciousconsumer #zerowastejourney #plasticfree #plasticfreelife #plasticfreeliving #plasticfreeforthesea #banthebag #nomoreplastic #plasticfreeocean #choosetorefuse #noplastic #saynotoplastic #wastefree #plasticsucks #sustainable #sustainability #sustainableliving #sustainablelifestyle #environmentallyfriendly #ecoconscious #lowimpact
One way to cut down on purchasing costs is to cut out the supplier, and find or create inventory yourself. She says:
What has worked well in my business is offering products that I manufacture myself. Whether I’m physically making the product with my own two hands or contracting with a local factory, I get a much better profit margin on my own products (in the neighborhood of 80%) than on products I source from outside. There are some products in my range that I really love and stand behind but whose margin isn’t great. Offering products of my own manufacture helps me to balance things out.
Particularly for boutique retailers, a great way to make your product offerings stand out is to offer exclusive, handmade, or vintage inventory. You can start with a limited supply in your brick-and-mortar store or online, and experiment with different special inventory—like making your own small-batch products.
5. Take a high sales-volume approach.
If you’ve been in the sales space for some time, you might have heard the phrase “always be closing,” aka “ABC.” This sales strategy simply means that there’s a constant drive to convert marketplace consumers into paying customers, in order to keep sales on pace with spending. This strategy is most successful for larger businesses that generate a lot of revenue—in that case, the small percentage left over after expenses is still a considerable amount.
Walmart, Target, and Amazon are all examples of retailers that rely on aggressive marketing and sales to continually grow their customer base and retain an active base of repeat shoppers. These companies are the exception in the retail industry, but there’s still a lot to learn from how big box stores make money, especially through their successful advertising initiatives and growth tactics.
One way to adapt this sales mentality for your retail business is to increase your sales force, incentivize lead generation, or even recruit current employees to take on some sales or marketing duties. Look into ways to engage your employees and consider incentivizing referrals and leads from all employees, not just salespeople. Syncing with your team about sales goals each month will make it easier it to track performance and stay on top of targets, and adjust sales strategies if necessary.
Take Action Now, Grow Later
Increasing profit margins is top of mind for most retailers, and depending on your business, there are a number of actionable ways to improve margins right now—starting with an evaluation of your operating expenses and inventory. From there, you can work out your current profit margin and start deciding how to incorporate these tactics into your day-to-day operations.
As you plan for long-term growth, take some simple, creative steps to increase your profit margins now—whether that’s building a website for your future ecommerce store, maximizing on seasonal sales patterns, or limiting inventory costs by creating your own products. Ultimately, the most successful way to sustainably increase profit margins is a mixed approach that incorporates various tactics—all of which share a bottom line of spending less and selling more.