How to Increase Net Profit dramatically!
A tall order, let us look at the basic retail formula to calculate the Net profit of your shop. It will look like the one below.
Now, if you look at this formula, let us discuss what you can concentrate on to improve your shop's net profit dramatically.
I decided to take a typical shop everyone can relate to, so I selected a gift shop and took the ATO benchmark figures here. So my shop has
Our mission is to increase the profit dramatically, so let us take each variable in the retail net profit figure. Yet as many variables are not mentioned here, I decided to fill the equation with some typical examples.
Traffic size: Making a significant increase in your traffic figure is tricky. You could try moving the shop's location to a better position, which may work. Better window displays, advertising, and different goods and services might help if you are a destination shop. All these items are long-term to medium-term projects. It would be hard to increase traffic dramatically.
Conversion rate: This is something that can be worked on now. Are you stocked correctly? Can customers see your products?
"It's much easier to double your business by doubling your conversion rate than doubling your traffic." – Bryan Eisenberg, Co-founder of Buyer Legends and NY Times bestselling author.
A 1% increase in this example of the conversion rate gives this shop an $8,000 profit.
Let us put a star on this one as it's actionable now.
Basket size: The shop layout can help; using your companion reports. It is much easier to sell something to someone already buying something in the shop. A standard method of doing this is to mix stock with frequently-bought-together items that can increase the basket size. See your reports on what sells with what.
This one is also actionable now so we will star this too.
Average price: This is a medium-term item. The most common method of doing this is to upgrade your products. Sell premium products in your shop. I have seen it work. I had one client that marketed $300 plus pens. You do not have to go this far, but most products have a range of premium products you can investigate. What you are looking for here is to pull some of your low-cost sales into high-cost sales.
For every 1% of your customers that buy a 30% more expensive item here, you make $1,600. It is a medium-term project. For many businesses, this is a difficult one to do. Your market sets prices. Consider re-inventing yourself here as a premium retailer.
Margin %: Few suppliers today have or are willing to give more. You may get something. In my experience, they are often ready to help sell more products, say with a stand, than reduce their price.
This is why it helps if you have something unique and can set your price.
The other problem is that few suppliers do have a dramatic percentage of your turnover. This produces many accounts that add up together. This makes it challenging to increase your margins as even a dramatic drop with one supplier will have little effect.
In this example, a 1% reduced cost gives this business $4,160 extra.
Shop costs: The big problem with reducing costs here is that the big ones are almost fixed and impossible to move. Labour is the big one, and how well do you think you will go asking your staff to take a pay cut? For your efforts, you may even end out in trouble. Checking your roster in your software can help here. Looking at your traffic reports would help too.
Rent is another one that is hard to move. Again it is a long-term proposition. Depending on your circumstances, you may be able to do something.
The other costs, the problem here is that nothing is costly, like the suppliers above. It is not one whole but a lot of odds and ends that add together. This makes it very hard to reduce them, and as they make up about 10% of this business, even a dramatic drop in one will have little effect.
Most businesses find selling more with the existing costs easier than reducing costs.
Overall, this means there are two actionable ways of immediately increasing your business.
1) Conversion rate
2) Basket size
Please have a chew; we will discuss these two items in detail soon.
