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Increase Gross Margin Seven Ways - Part 2

Furniture World Magazine
Volume 148 NO.3 May/June


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There are two kinds of retailers: those folks who work to figure how to charge more, and companies that work to figure how to charge less." -Jeff Bezos


I recently read that Jeff Bezos of Amazon once said, "There are two kinds of retailers: those folks who work to figure how to charge more, and companies that work to figure how to charge less, and we are going to be the second." I encourage most of you to act like the first retailer that Bezos mentioned rather than racing for the bottom where few profit dollars remain. Here I will discuss some field-proven ways to maximize your Realized Gross Margin. The concept of Realized Gross Margin was introduced in the March/April 2018 issue. If you missed it, visit http://www.furninfo.com/Authors/List and scroll down to David McMahon.

Coincidently, Amazon just recently increased its Amazon Prime prices by 20 percent for over 100 million subscribers. That equals two billion dollars in additional margin annually. I believe that Amazon is sending the message, "Where you give value, get your margin!"

Gross Realized Margin is the better way to track topline business performance to better understand where your margins come from. Using Realized Gross Margin, a company gets a truer picture of where they stand after sales transactions occur. With this information, managers can make faster, better decisions and capture extra profit.

The equations that apply to calculating Realized Gross Margin are:

  • Sales of Retail Goods + Sales of Protection = Total Sales

  • Total Sales - Total Cost of Goods Sold = Gross Operating Margin
  • Gross Operating Margin + Vendor Discounts Earned - Credit Card Fees - Finance Company Fees = Realized Gross Margin

Ways To Maximize Realized Gross Margin

1. Grow Protection Sales: Protection is the highest margin product that most furniture businesses sell. Increasing the proportion of protection to total sales can have significant impact. To do so you need to focus on these major elements:

Belief. Organizations that succeed, do so because they believe. Belief, starts at the top with company leaders. If you truly believe in the value protection provides to your customers, and would buy it yourself, then you have what it takes to achieve high margins through protection sales. If you do not, it is probably better to look at other ways to maximize margin.

Communication. Protection does not sell itself. Training people how to best communicate the value of protection is essential. The discussion should be interwoven throughout the purchasing cycle (your selling system). If your sales people take the time to find out how their customers plan to use purchased products, the odds of adding on protection are greatly increased. Think: Lifestyle Selling.

Incentives. Businesses that have the right people working for them in the right roles, do what they are incentivized to do. If you want your people to sell more protection, develop a performance plan with this objective in mind. The old standard of paying a flat 20 percent on protection is dead for most of my clients. There are more innovative methods now in use.

Review: Inspect what you Expect. Do it often. Do it as a team.

2. Put more resources in the Top Turning Items. Resources at your disposal to increase Realized Gross Margin by selling more of your top selling items are:
Human Resources. Your best sellers produce most of your gross margin dollars. So, insist that your buyers and merchandisers put most of their effort into maintaining these items.

  • Ensure top items are nailed-down in the showroom.
  • Give them good position digitally.
  • Display them impeccably.
  • Price them correctly.

Perform detailed price reviews and make routine adjustments. The real high margin game is won by looking at the details of your business in a dynamic way. It is, therefore, worth a large proportion of your people’s time.

Capital Resources: Invest more dollars in areas of your line-up that are performing well. That means:

  • Back-up best selling frames that sell as shown.
  • Expand additional frames for vendors that produce well.
  • Expand top categories.
  • Grow high turning price-points.

Of course, you cannot continually grow inventory, so do so only when slow turning slots are sold.

3. Minimize Product Costs: The best retail operators continually work to bring their product-related costs down. I’ll mention three components here:

Market Sourcing: At wholesale markets, seek product that is not shopped online and/or that you can get exclusivity in your region. If you are a volume player in your area, arrive early to lock-in deals prior to your competitors.

Also, shop with retail price points in mind. Do not search for products based on cost. Go to market prepared with a shopping list that includes category, vendor, style, retail price, lead-time, terms, and required landed cost. When you browse the showrooms, avoid talking or looking at the cost. When you see a piece you think you can sell for your targeted price point, only then ask about the landed cost. If the terms, lead-times, and minimums meet your requirements, you might have a winner.

Weigh Mixed Container Costs: If containers are do-able for your for your operation, seek container preferred pricing on your top sellers. Try to mix the containers with as many different items as possible. In this way, you hedge your bet. When you get a blend of product at different landed costs available to sell, you minimize average costs, thus maximizing realized gross margin.

Freight: Freight is a big part of cost of goods. Know the difference between PO, raw cost and landed costs. Make this a part of the purchasing decision. Shop carrier options annually. Price to cover maximum freight charges.

4. Minimize Protection Costs: Businesses often leave money on the table in how they price protection. I am a believer in pricing in ranges depending on the amount of the total sale before protection is added. Protection should be priced at a dollar amount that corresponds to the high end of each range, at 10 percent. For example, if one of your ranges is $1,000 to $1,999, then your protection could cost $199. In this way, you get greater than 10 percent protection to product on most sales with protection. Protection margins should be around 80 percent if you are using a typical third-party service. If you are using a hybrid-type of self-insuring, then higher margins are possible.

5. Work To Get More Vendor Discounts And Rebates: Vendor rebates and terms credits can add two percent or greater in realized gross margin. Consider joining an industry buying group to take advantage of volume negotiated discounts.

If you maintain lean inventory to sales volume while producing above average net income, your net free cash flow will allow you to take advantage of payment terms discounts. In turn, this will further add to overall profitability.

6. Minimize Credit Card Fees: Many operators do nothing about this cost. Merchant fees are just a necessary part of doing business, right? They are a convenience for the customer and the business. However, it is important that you have agreements that makes sense. Shop your service at least every couple of years. Understand all the elements and charges such as on-premise swiping, online transactions, COD charging, security, credit vs debit card options, all fees and possible circumstantial hold-backs.

7. Minimize Finance Fees: Third party financing fees will depend on your business model. Some retail operations incur almost zero fees while others may have an expense ratio of over six percent of total sales volume. I believe that there is an opportunity here for everyone, with respect to maximizing realized gross margin dollars.

Those businesses that never use financing because their customers are generally “well-to-do” and their product is “high-end”, are missing some sales. Customers who finance have higher average tickets. That is a proven fact! People with high-paying jobs are not always cash flush. If the availability of 12-month financing a portion of the purchase is communicated properly during the buying process, some customers will choose to add-on extra items now rather than waiting, or they will choose an upgrade. If incremental improvement in average sale is important to you, consider this fact.

For other business that regularly use third party financing, there are a variety of ways to use it more effectively to increase realized margin. You can advertise your long-term options, but encourage only terms that are necessary for each specific customer. Thirty-six months may work just fine! Other ideas include using monthly payments as a negotiating tool rather than price. Tag pricing to reflect financing, and require protection purchases to match the terms of the sale.

What Is This All Worth?

Does 10 percent of sales volume sound like it is worth the trouble? Or speaking annual pre-tax cash flow, does $100,000 per million dollars in sales sound like it is worth it? That is the difference in realized gross margin for a low performing operation and one that's high performing. High performing retailers have more cash resources left over after sales transactions to fund their business operations for further growth. I encourage you, whatever your realized gross margin, to track this metric closely and incorporate some of the seven methods in this article to improve it. Amazon obviously thinks it is worth it!

David McMahon is a Certified Management Accountant and Consultant with PROFITconsulting, a Division of PROFITsystems. Questions about this article, or to request a similar analysis on your financial statements contact him at Davidm@furninfo.com or call 8oo-888-5565.

Read other articles by David McMahon