Margin Erosion – The Silent Killer
Many retail businesses are suffering from an insidious ailment that is devouring their profits. It sits out of sight beneath the surface of the business – unless you know what you are looking for! This ailment 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 & waves. Margin Erosion is like a worm inside an apple. You will not notice it on the outside of the business – everything will appear to be in order – sales good, customer numbers good, etc. But it will slowly eat away your profits from the inside out. It is not until the cash flow dries up that a retail owner will begin to notice the effect this margin erosion has had on their business. Suddenly, you will find it difficult to make ends meet – there won’t be enough money coming in to cover your expenses. Which can be perplexing if everything on the outside seems OK. Fortunately, there is a cure for Margin Erosion!
Margin Erosion, like any force, has certain conditions which suit it better than others. In the right conditions, margin erosion can devour the life from a retail business from the inside out. What makes a business more susceptible to Margin Erosion?
- Lack of margin/GP tracking
- Flawed pricing strategies
- Poor or non-existent expense management strategies
- No ‘checking’ on buy price at receipt of goods into the store
- Excessive discounting, or too much ‘sale’ activity
- Bank Fees/compliance costs/etc – fairly minor, but retail is detail and every cent counts!
- Lack of efficient Stock Control/write off policies
- Employee/Customer Theft
- Inflation
So how do you check if you have a Margin Erosion issue, and how do you fix it?
Once you know how to look at your business finances, you will quickly start to identify the culprits that allow this insidious ailment into your business. You MUST be tracking your Gross Profit (margin) – on a daily, weekly, or at the very least, monthly basis. Most POS software today should do this for you, but if not, there are still ways to keep an eye on this (The 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 dropping 0.5{da74ea48cec7d1c659e4125ffe517180d7bd6cbbe5631d32f11d21c45900f39b}, 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 worming it’s way through your profits. If it is, then you need to identify the root cause of this, and ruthlessly eliminate it!
A couple of the major causes of Margin Erosion are quite simple to eradicate. Having an effective pricing strategy in place is perhaps the most important of these. In fact, your pricing strategy is one of the key building blocks of your retail success. Two FLAWED pricing strategies are:
- Stick to the Supplier RRP (MSRP) – so many retailers are terrified to deviate away from this figure, yet don’t even understand how the supplier came up with that figure! Sticking to RRP is a sure fire way to erode your margin.
- Apply a blanket/universal mark-up. I am amazed how often I see this – cost + 40{da74ea48cec7d1c659e4125ffe517180d7bd6cbbe5631d32f11d21c45900f39b}, or cost +100{da74ea48cec7d1c659e4125ffe517180d7bd6cbbe5631d32f11d21c45900f39b}, whatever the number, so many retailers are still using an arbitrary mark-up method to price their goods. Not only is this a lazy pricing method, it flies in the face of what retail is all about – BUY as well as you can, SELL for as much as you can, while maintaining healthy turnover.
If your retail business is using one of these strategies, then talk to me, or buy The Retail Prosperity System – it covers off this topic in detail, and outlines the same pricing strategy I use in retail (and unlike many so-called retail experts, I have a very successful retail business of my own!)
Another vital cause that is very easy to prevent is simply checking your buy prices. Most suppliers ‘reserve the right to change prices’ whenever they want to. And you will be very surprised how often they do this without informing you! Every time you receive goods, check the buy price is the same as it was. If it has increased, even by 1-2{da74ea48cec7d1c659e4125ffe517180d7bd6cbbe5631d32f11d21c45900f39b}, then you have a problem – ring your Supplier and ask for an explanation!
If you want to profit – and profit well – from Retail, then you should be watching out for margin erosion. There are many causes, but in the vast majority of cases, the cure is simple, and will not cost you anything apart from a bit of time. Sure, time is a valuable commodity in retail – we all know the Retailer curse – the half drunk cup of coffee! But make time, it could be the most valuable investment you ever made in your business!
