The Mirage of Dealer Margins
How to calculate real profit in dollars and cents
Bruce Bjorkman -- Casual Living, May 21, 2013
While at the show, I happened to overhear a conversation between an exhibitor and a prospective dealer over margin of dollars earned. It was enlightening, to say the least. It also alerted me to what I consider to be a common misperception by retailers who are only focused at evaluating a product based on margin, rather than the dollars which could be made selling the product.
At the show, I listened to the exchange between the retailer and the seller. The retailer liked the seller's product and features, but was concerned that the product didn't meet his "margin standard" as he called it. "I HAVE to make at least 40% on every item I sell, otherwise I'm not interested," I heard him say.
"So at 40% margin, how much do you make on brand X grill?" the seller asked.
"Three hundred dollars," was the retailer's reply. Whereas, with the seller's product margin at 35%, the retailer makes $699, an amount twice as much as the brand X product. Even after deducting freight costs, the dollars made with the seller's products still generated more dollars for the retailer at the lower margin.
Therein lies a deep pothole that many retailers fall into. They fail to calculate the dollars represented by the profit margin. Imagine being able to sell an item that makes you 150% margin. One hundred fifty percent! Who wouldn't want to sell a product like that all day? However, when you peel back the onion skin and truly calculate just how many dollars that margin represents, guess what? You'd have to sell a boatload of that 150% margin item to equal the sale of just one of the 35% margin item. Let's use a hypothetical example: Say a dealer takes on a new line of barbecue brushes, which cost $5 each. He sells the brush for $12, making a 100% margin! In dollars and cents, the retailer only makes $7 for each brush sold. He would have to sell 1,000 brushes to equal the $700 he'd make selling just one grill with a 35% margin. However many retailers, focused strictly on margins say to themselves, "Wow! Look at the margin!" They fail to see what the actual dollars earned really are. See the pothole you're headed for when focusing strictly on margin?
In the business world, I clearly "get it" that cash is king. Cash is where it's at. You bank dollars, not margins. By rigidly and only focusing on percent of margin, it's easy to miss what the real profit opportunity could be.
When evaluating a new line or item, you should take what I call a 360-degree view of the product:
1 What is the amount of dollars earned from this product?
2 How will this product line enhance my store's image and what I am already selling?
3 What's the quality and uniqueness of the product? What does it bring to market that helps it stand out from competing products?
4 Does adding this product to our profit mix help differentiate our store in the marketplace?
5 Are there reasonable add-on accessories available, which can help boost the gross sales figure?
6 Is this a product we can sell with passion and enthusiasm?
7 What's the "buzz" factor about this product like?
If you're only going to sell to margin, you could genuinely be missing out on making some very real dollars. Don't fall into the margin only pothole.
Tiny Girl, Big Dream