The RMS Guide to Becoming A Retailer, Part 2: Margins + Competitors

margins

In Part 1 of our guide on how to be a retailer, we focused on how to pick a product area and perform research in that market area. For Part 2, we’ll be covering two core aspects of running any business – retail or otherwise – margins and competition.

There are some sobering statistics about startup failures and retail closures so it is doubly important to enter a market knowing a) that there is potential for profitability at some point and b) that you can compete against your established competitors.

Margins make or break businesses. Businesses who enter markets with low gross margins will have to achieve larger sales figures to cover other business costs. Having good gross margins will give you greater flexibility and allow for additional sales and marketing tactics such as half price sales or bulk discounts.

Setting the price of your product depends on several factors: how much you bought it for, how much people are willing to pay for it and, most importantly, the price your competitors charge. Entering a market where there is competition (which is every market, unless you’re introducing a brand new product category) means that your business will be defined by your competitors. How much do they charge? How good is their product compared to yours? How good is their customer experience?

Let’s begin this guide by covering some basic mathematical principles which are essential to business.

Business Math for Beginners

Gross Margin: Your gross margin is how much you sell a product for minus how much you bought the product for. For example, if you sell a product for £100 which you acquired for £70, then your gross margin is 30% (£30 divided by £100). Whether you are buying your product wholesale from a supplier or whether you are having the product manufactured, chances are that your supply chain will provide you with the product for less when you buy more. This bulk discounting reflects economies of scale and is quite hard for a new retailer to achieve. It is therefore likely that as a new retailer or restauranteur, you will not be receiving the best possible prices from your supplier – meaning that if you are to sell at the same price as your competitor you will have a smaller gross margin than them. By having this Gross Margin advantage on you, your competitor may try squeezing you out of the market by reducing their prices and putting pressure on your Net Margin.

Net Margin: Your net margin is how much you make per product sale once you’ve subtracted business expenses. Rent, staff costs, licenses, taxes, electricity and marketing can all factor into your net margin. For new retailers, it may be hard to accurately project net margin but it is definitely something you should consider before opening any retail or hospitality business. When you’re opening a new business, the chances are you’ll be based in a building whose rent was publically advertised, hiring staff whose wages and hours were publically advertised and paying licenses and taxes that your competitors pay. This means a diligent competitor can work out your fixed costs and how much you’ll need to sell to become profitable. If a competitor can make these calculations then you, as the business owner, should be making these calculations too!

rms-table
The RMS Quick Guide to Discounting

Fixed Costs & Variable Costs: A 12-month lease on a retail unit is a fixed cost for a business. For many businesses, staffing is also a fixed cost. Fixed costs stay the same, regardless of how much you sell. Variable costs change depending on how much you sell e.g more or less electricity usage due to changing opening hours.  More flexible approaches to staffing, such as part-time or temporary staffing might allow your small business the flexibility to succeed.  Fixed costs should be accounted for in your pricing model from the start. Many variable costs are cyclical or seasonal and depend on things like peak times. It may be hard for a new retailer to accurately project demand throughout the year but it’s essential to attempt this and constantly learn from your store’s performance. More than 25% of the UK’s biggest retailers are loss-making. This fact might be quite sobering for aspiring new retailers but larger, established organisations lack the flexibility and agility of smaller companies.

Loss Leaders: As a retailer or restauranteur, chances are you’ll be selling several products all with differing margins. It is therefore important to gauge the popularity of each product both for profit expectations and for stock management (which we’ll be covering in a later guide). You may have heard of the concept of Loss Leaders, which is popular among large retailers both online and offline. Loss leaders are simply products which are sold at a loss, in the hope that the footfall generated from such a great deal entices customers to buy other, more profitable goods. The hope is that customers psychologically link your brand to bargains and establish a habit of shopping with you, even when products are sold at a decent profit margin. This is not a technique we’d recommend among new retailers as there is a serious risk that customers will only buy your loss-leading item and leave you with serious cashflow issues.

Scouting Your Competition

Understanding what you’re up against can be overwhelming but is absolutely essential to success. If you’re selling pretty much anything from food to clothing to electronics to furniture, then you are competing against Amazon. In previous articles we have discussed the importance of great customer experience and niching into new markets are great ways of winning in this world of increasingly global e-commerce. Building a great reputation is a surefire way of driving traffic to your store but takes time.

We also discussed some of the online tools you can use to research in the previous article. It’s important to frame your competitors in terms of direct and indirect. If you’re opening a tea shop then a tea shop one street over is a direct competitor. Amazon sells tea that can be prepared at home so, in this case, they are an indirect competitor. Amazon selling really cheap tea bags is unlikely to destroy your business but any market trends towards more people drinking tea at home or tea becoming less popular do provide an existential threat.

Understanding that similar businesses in your town are absolutely your competitors but that they do not shape overall market or consumer trends is essential to creating a business strategy. Selling a new variety of tea might be wise if there are wider market trends towards that tea. Selling a new variety just because your competitor down the street has introduced it is probably not as wise.

Conclusions

Margins and competitors make or break businesses. Being as well informed as possible about the numbers, about market trends and about what your competitors are up to will give you a better chance of success. Keeping on top of this information will allow you to react with the agility and flexibility required to succeed in today’s increasingly online market.

Great EPOS systems can create powerful reports and dashboards to keep you on top of the performance of individual products. At RMS, we’ve been specialising in great EPOS for over 14 years. If you’re thinking of starting a new retail venture then we’d love to hear from you.

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