15 Ways to Increase Retail Profit Margins, Part 2

This is part 2 of 2. Find part 1 here.

You’ve chatted with your accountant and understand your current retail profit margin. You’ve also looked at the average retail margin for your industry, and you have a reasonable profit goal in mind. Now, let’s get you to where you want to be. Here are 15 ways to increase your profit margins starting today.

1. Increase prices

You don’t have to increase prices across the board. Instead, selectively raise the cost of your most popular items. You’ll effectively add to your bottom line and improve profit margins too. Remember this: your customers don’t know your cost of goods. Plus, they’re purchasing from you for the shopping experience; the product is just a souvenir.

Pro tip: Are you one of the lucky retailers slammed with revenge buying customers? Scarcity gives you cover to raise your prices (if you have the merchandise.) Don’t be afraid to do so.

2. Narrow your focus

You can’t be all things to all people – nor should you try. Have you ever dined at a restaurant with a menu like a novel? There might be 200 dishes to choose from, but they’re all mediocre at best. If you’re like me, you much prefer the restaurant with only 12 plates, each of which is outstanding. Last year, for example, Wegmans cut 40% of their SKUs to avoid out-of-stocks on staples. Consider how much profit you’re earning on slower-moving items. Could you devote that shelf space to quicker-moving, more profitable items? Yes!

3. Limit the discounting

It’s tempting to turn to discounts when you need to make a sale. But without a plan, markdowns rob you of earnings – and they certainly don’t increase retailers’ profit margins. Let me tell you about a toy store owner I know. Every time she has bills to pay, she hops on Twitter to give her followers a same-day 30% discount. She thought it was brilliant… only it wasn’t. What this retailer didn’t realize was this: she was robbing herself of her own retail ROI. Sure, she paid her bills on time. But she also taught her customers not to purchase at full price — that it’s better to wait for the next Tweet announcing another discount.

Discounts can work, but sparingly. A quarterly promotions schedule is a good idea. That said, customers in a post-Covid world seem less driven by price than by safety. So limit the discounting.

4. Cut waste

Are you hiring out for jobs your current staff could do? Take the window washer. Do you really need to pay an extra person to do this task? Get more done with who you have, even if you’re not at full staffing yet. Your retail profit margins will thank you.

5. Schedule retail employees to need

Do you have three employees opening when you really only need two? Are you understaffed every Saturday when you know you’re always slammed? Ensure your employees’ schedules best fit your stores’ needs. Save money where you can, but don’t risk losing customers to the competition because of poor service.

Pro tip: With more people working from home, the conventional thinking that Saturday is the busiest shopping day isn’t always true. Use your numbers to inform your scheduling.

6. No overtime — period

I’m not saying you should take advantage of your retail sales employees. However, don’t let high-cost hourly managers fill in for entry-level hourly employees. If something comes up, use salaried staff instead.

7. Don’t schedule for the convenience of your employees

Want to know a managerial skill that will improve profit margins? If you need your employee Vance for only 4 hours, schedule him for 4 hours (even if he would prefer to work eight.) Also, if your area is still heavily affected by the pandemic, consider staggering your shifts. You have to keep your doors open to improve profit margins.

8. Award extra hours based on merit

Grant employee requests for more hours based on their average sales (or the number of units per customer sold.) I know you want to be a nice boss, but it’s better to reward the retail associate helping you sell merchandise than to say yes to every staff request.

9. Personally hand out all paychecks

When you see how much each staff member takes home, the cost becomes real to you. However, don’t just pass out checks. Say thank-you to show gratitude where it’s due.

10. Give bonuses when deserved

Pay bonuses proportionate to profit, not total sales numbers. Otherwise, you might reward an Expressive or Driver salesperson — two personality types that use discounts to make sales, effectively robbing you of profit.

11. Look for theft by matching inventory to sales

A full-featured POS system makes it easy to track what came in the back and went out the front – and what went missing in between. If you don’t have the software, there are workarounds. For example, a restaurant franchise I know audits internal theft by matching the number of cups received to the number of drinks ordered.

12. Cut vendors

When you buy more from fewer vendors, you’ll often get a better deal on pricing, shipping, and dating. Ordering only a few items from multiple vendors also requires more bookkeeping and tracking, plus you’ll pay top dollar trying to meet each minimum order. Even with the unknowns in merchandise forecasting, no one item is so special that it requires countless vendors. Simplifying your orders is an easy way to improve any retailer’s profit margins.

13. Combine your orders

Are other local businesses purchasing similar items from the same vendors? Combine orders to get freight and larger-order discounts. Clarify early on who is paying what, then pay before delivery to avoid complications.

14. Sell added value by bundling products and services

Your customers value their time. So, they’ll pay for valuable services related to the products you carry. Take Best Buy’s Geek Squad. They promise to fix any computer problem – anytime, anywhere. Of course, they leave off “for a price.” People don’t want the hassle of figuring things out themselves. And they really don’t want to screw things up. Selling added value is the way to a very profitable future.

15. Fire unprofitable customers

Every retail business has that customer – the one who needs all the hand-holding; or the one who beats you up on price and constantly calls you with time-consuming problems. If your company is large enough, ask your order desk or sales rep to provide the top 10 complainers. Then match them to the number of profitable orders they generate. Even if they deliver large volumes to your business, they must pass the profit test. If they don’t, tell them this:

“While I appreciate your business, the cost to manage your account outweighs the profitability. Therefore, we must implement an appropriate price increase.”

The bottom line

Most retailers evaluate operating profit margin a few times a year: after a complete physical inventory to see how much money was on the sales floor; during the first quarter after the holiday dust has settled; and around tax time with a current P&L statement. But if you’re serious about increasing profit margins, any time is an excellent time to review your numbers.

Improved retail profit margins don’t just come from discounts or cutting staff. Instead, limit unnecessary costs while increasing the number of items sold at the right price. That goes for expensive products too.

Start using these 15 tips today, but be sure to train your staff and also improve your customer shopping experience. You’ll be in business for years to come.

Bob Phibbs, “The Retail Doctor,” is a 30-plus year retail expert with a proven track record to help brands lift sales, turn their retail staff into real salespeople, and get more out of their store traffic with innovative retail marketing tactics. Contact him at 562-260-2266, or visit his website.