Profit margins is an important metric in retail that indicates the profitability and stability of the business. It is a measure that helps you understand the pricing accuracy, operational spending, revenue, cash flow, and complete financial health of your business.

Although retailers know increasing profit margins is the only way to thrive in business, some of them struggle to implement the right strategies due to lack of proper guidance. This blog post will take a look at ideal retail profit margin, how to calculate different profit margins, and discuss a few effective strategies to increase retail profit margins.

What is retail profit margin?

Retail profit margin is referred to as the percentage of overall business revenue that is considered a profit. It is a measure of money earned in a retail business after deducting the company's expenses and the initial cost of goods.

Types of profit margins in retail

Before you understand the ideal profit margin for your industry, it is necessary to know the different types of profit margins and how to calculate them.

There are three types of profit margins in retail: gross profit margin, net profit margin, and operating profit margin.

Gross profit margin and formula

Gross profit margin, measured in percentage, is the money a company makes after deducting the product cost. Gross profit margin helps you make better decisions on cost control, pricing strategies, and production optimization.

It is calculated by dividing the difference of revenue and cost of goods sold (COGS) with the revenue and multiplying the decimal by 100.

Here, the cost of goods sold includes production cost, acquisition cost, electricity, marketing, and similar costs; the revenue considered here is the money earned before subtracting operating costs and taxes.

Gross profit margin = (Gross profit / Total revenue) x 100
where Gross profit = Total revenue – Cost of goods sold

Operating profit margin and formula

Operating profit margin, measured in percentage, is the money left after leaving out the product costs and operating expenses. Operating margin indicates how efficiently the business operates and generates profits.

It is calculated by subtracting the cost of goods sold and operating expenses from the total revenue, then dividing the value by total revenue, and multiplying the decimal by 100.

Here, the operating expenses include rent, salaries, utility bills, marketing, insurance, licenses and permits, and miscellaneous expenses.

Operating profit margin = (Operating profit / Total revenue) * 100
where Operating profit = Total revenue – Cost of goods sold – Operating expenses

Net profit margin and formula

Net profit margin, measured in percentage, is the money a company makes after deducting the product costs and all the expenses. Net margin indicates how much of your total revenue is translated into profits and gives more visibility on the impact of taxes and debts on the company's success.

It is calculated by subtracting the cost of goods sold, operating expenses, interests, taxes, and debts from total revenue, then dividing this value with total revenue, and multiplying the decimal by 100.

Note: The formula for net profit margins is the same as for gross profit margins except that you should also deduct operating costs and accounting expenses such as tax, debts, and interest from the total revenue.

Net profit margin = (Net profit / Total revenue) * 100
where Net profit = Total revenue – Cost of goods sold – Operating expenses – Interests – Taxes – Debts

Tip: The ascending order of profit margins in terms of number would be in the following order.

Gross profit margin >> Operating profit margin >> Net profit margin

What is the ideal profit margin in retail?

The question of how much is a good profit margin in a retail business is the first thing retailers think about, but the answer is not straightforward. It depends on various factors such as the type of business, business size, business region, stage, store location, age of the business, operational efficiency, business model, competition, external reliability, and more.

An ideal net profit margin of a retail store ranges from 0.5% to 9%, and gross profit margin ranges from 5% to 65% based on the type of business. As a standard, with all the above factors in mind, the average gross profit margin in retail is 53.33% and average net profit margin is 2.35%. ^#

#Reference: Lightspeed.com, Alicepos.com

One thing to note for new retailers is that, at the start of your business, your profit margins will be high since operational costs will be less. However, as your business grows over time, operational costs increase and your profit margin decreases.

Irrespective of the category of business, here are a few feasible and actionable strategies to help you boost profit margins in your retail business.

How to increase retail profit margin

1) Increase the price marginally

A simple and straightforward way to increase retail profit margins is to increase the price of the products. It might sound easy, but it is a difficult decision for retailers to make because they fear losing customers due to price hikes.

Research your competitor's pricing, compare them with your price and margins, raise the prices for a few products first, gauge the customer's reaction, and if found successful, do the same for necessary items. Another way is to raise the price of low margin products, group them as kits, and make sales.

2) Pay attention to pricing strategies

Optimize operating expenses such as utility bills, advertisement, marketing, and rent to improve profit margins. Adopt dynamic and competitive pricing based on seasonality, demand, and customer behavior. You can also try penetration pricing to set the price lower initially and increase it gradually as your business grows.

If customers show interest in your store for the shopping experience, adopt value-based pricing for exclusive products, premium brands, and new features. Minimize the frequency of discounts, add a cap on large discounts, and offer only personalized offers to save profit margins.

3) Increase the perceived brand value

Create personalized and emotional connections with customers through attractive colors, appealing store ambiance, engaging product displays, and captivating signage. Maintain exclusive style and branding in all the mediums of customer interactions with your store.

Build trust and credibility by partnering with brand influencers, showcasing customer reviews and testimonials, and ensuring good customer service. Once customers gain confidence, they keep coming to your store regularly and will be ready to pay higher prices for the value and service being offered, thereby increasing your profit margins.

4) Increase average order values

Once you elevate brand perception, attract customers, and make them shop with you regularly, increase the average order value or average transaction value with upselling and cross-selling strategies. Train your staff to convert passive visitors into customers and sell additional relevant products to increase order values.

Offer loyalty points, rewards, and coupons to encourage customers to shop with you repeatedly. Encourage staff with incentives and prizes for those who meet or exceed the sales targets. Add suggestive recommendations on ecommerce sites to nudge buyers to purchase relevant items and increase their cart value. Offer exclusive discounts and incentives if customers purchase above a certain amount to increase profit margins.

5) Eliminate products with low margins

Analyze the performance of all products regularly, identify those with poor margins, and look at ways to improve their profit margins. You can send them back to the supplier on time if feasible, or push them out to customers by selling those products on offers, kits, and combos.

Any product with less than 20% markup price does not contribute to your profit margins, and it is wise to stop ordering them in the future. Once you eliminate these products, you can utilize the shelf space to stock products with high profit margins to make more revenue.

6) Take steps to avoid pilferage

Do not make your staff work beyond work hours or extend their work shifts. If you must do this, encourage them by rewarding them with bonuses, gifts, and compensatory permissions. Give half-yearly or annual bonuses to staff based on profit and inspire them to achieve more.

Pay your staff on time without any dues and distribute salaries personally by giving them positive feedback on their contribution to revenue. Taking these measures will ensure they are truthful, loyal, and take more responsibilities to improve your business.

7) Build a strong supplier relationship

Find ways to reduce the supply chain cycle with a good distributor network and bring the products from production to your store with minimum hierarchy to minimize cost and complexity.

Review the supplier fill rate periodically with AI-based solutions and communicate with them personally if supply margins decline. Build a strong and loyal supplier relationship by being friendly and making on-time payments.

8) Manage inventory efficiently

Reducing the price of slow movers to sell them is a big mistake as it will reduce the overall business revenue. Instead, sell products quickly based on the first-in, first-out approach. Do not keep products idle until they expire as it will then be difficult to sell, return, or exchange them. Take actions on low-performing items quickly if they need to be sent back to the supplier.

Track the current stock and product movement regularly to identify low performing products and move them out quickly. Avoid overstocking as it will spike the inventory carrying costs, and understocking as it will lead to stockouts. Add new products to the inventory based on customer tastes so you adapt to the latest trends to make more sales.

9) Plan your purchases ahead of time

Procure products in bulk at wholesale prices in advance, repack them, and sell the products with a good markup price. In this way, you can ensure availability of products anytime and won't miss out on any customers. Purchasing items in bulk also reduces the logistics cost and packaging cost.

You can also ask for complimentary products and free samples if the order volume is more, and you can sell them to customers with good profit margins. Forecast the demand during seasons and festivals in advance and plan purchases ahead of time.

10) Adopt technology

Implement omnichannel ERP with advanced features that enable you to handle sales, purchases, inventory, reports, accounting and easily while empowering you to make informed decisions to operate your business efficiently and secure profit margins from anywhere.

Get smart tools and AI-based technologies that allow you to make accurate autonomous purchases, review supplier performance, forecast demands, and plan replenishment and transfers at the right time with minimal errors and the least human intervention.

How Gofrugal can help grow your retail business

Protection from supplier margins

Get notified of changes in supplier margins from agreed conditions and take actions immediately before completing the purchase process. Secure your business margin leakage with gatekeeper margins to ensure profit margins are in control.

Complete control over the selling price

Automate the price markup in amount or percentage for MRP or selling price based on changes in cost price to retain profit margins. Assure profits by selling items with the same gross margin based on investment.

Secure margins with slab-based pricing

Control the selling price of items or categories across outlet locations based on the quantity sold. Set different prices for the same item or a specific group of items with customizable purchase formulas.

Safeguard margins from employee theft

Avoid misappropriation of data and money with restricted access controls to menus and screens to employees. Assign only the required access to staff based on roles and safeguard data from manipulation.

Freedom to configure settings

Enjoy the freedom to restrict negative sales, rate edit, and manual discount with specific configurations. Enable configurations to restrict selling price dropping below the landing cost in order to secure your profit margins.

Mobile business assistant for complete control

Monitor your store sales, purchases, and inventory in real time with the digital business assistant, WhatsNow. Configure approvals for price-related changes in bills and purchase orders from the mobile app based on need to avoid data manipulation.

Increasing retail profit margins is not just one day's work, and it needs continuous focus with a clear eye on competitor strategies, changing consumer needs, and the latest trends. It is not sufficient if you analyze and review your business profit margins just once a year during the financial year-end; do it regularly with smart reports and take immediate actions.

Do you want to adopt a comprehensive ERP with real-time reporting and audit logs that secures your retail profit margins? Get in touch with us today.

How to increase retail profit margins? [10 Tips]

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