There are factors internal to your business that you can control and affect the bottom line. Here are a few.
Retailers often think that the next boost in their business is going to come from finding the next amazing line of merchandise, or discovering a new marketing tool (the next Facebook?). Sometimes they believe it will happen because they hired a killer salesperson, or hope that new businesses will fill vacancies around them, which will bring traffic.
The problem with all of these “solutions” is that they are external to your business. You cannot predict or control them, nor can you invoke them when you need more cash. As such, while they are fun to dream about, they are not what you should focus on to improve your business.
Small adjustments such as the ones outlined below, can have enormous impact on your specialty retail operation. They are easy to implement, and if done properly, will bring about tremendous positive change.
Adjust your selling cost
Most retail businesses operate on some variation of the “base plus commission” sales model – which is often implemented poorly. Many specialty retailers pay commissions on the first dollar sold when sales people should need to hit a goal first. Sometimes commissions are not planned in such a way as to keep the cost of sales in line. Let’s tweak that and see
First, a definition: “Selling cost” is defined as the percentage of your sales that go to pay your sales people. The formula for this is Total Cost of Sales (which includes salaries plus commission) divided by Total Sales (without tax). As an example, if you have an employee whose payroll cost for last month is $1,700 and that employee sells $12,500, then the selling cost for that employee is $1,700/$12,500 = 13.6%.
Now, what if you put in a commission plan that keeps the sales at a good percentage, such as 9%? How? Try this—take the hourly wage for your employee and divide it by .09. That number is the employee’s hourly goal. For example, if you have an employee that is paid $10 per hour, you would divide
$10 by .09 and you would get $111.00. That is what that employee has to sell each hour.
Now take that hourly goal and multiply it by the number of hours that person works in a week. If he/she works 30 hours, the goal is $3,330, As soon as they hit that goal in the week, you can pay them 9% of all sales above the $3,330. This gives them incentive to sell, helps them earn great commissions, and keeps your selling cost low.
We did that in a store whose annual sales were $750,000. Look at the results below.
You can see that by implementing this strategy, we lowered their selling cost by 2%, which resulted in an extra $15,000 in cash to the bottom line. But wait, we’re not done. That’s only the first tweak!
Lowering your purchases
This one almost seems too easy, but watch the math. We took a store and found ways to lower inventory purchases by 2%. Look at the results.
Yes, it’s another $15,000 improvement. But let’s be careful here. This was not done by hacking 2% off of all orders unilaterally. It was done by determining which categories are “signature” ones for the store and which ones are carrying more inventory than they should.
This was done systematically, using all the tools afforded by open-to-buy (definition: open-to-buy is a great sales forecast by class, accompanied with an inventory plan that prevents you from overbuying or underbuying). The overall goal was to cut purchases by 2%, but the challenge was to figure out precisely how and where. If you aren’t using an open-to-buy plan to do this, consider trying it out.
Adjust your Markdowns
I can see you rolling your eyes. It’s true that there is no such thing as a “perfect buyer” and buying is the toughest job in the business. Having said that, there are some strategies we can use to reduce or limit the markdowns.
First, most specialty retailers do not have a solid markdown strategy. Goods need to be given a sufficient time on the floor to sell, but after that they need to be identified as slow movers and we need to free up the cash they’re holding down. The earlier we do that (especially for seasonal goods), the lower the markdowns, and the better chance of us moving through the goods faster.
Markdowns are usually caused by the following:
• Receipt of late goods
• Overbuying beyond demand
• Inadequate department/class structure
• Bad forecasting
• Bad buying
• Too broad an assortment
• Not reacting to early poor sellers
• Bad sales performance
We can develop strategies and measurements to reduce or control all of these. Here’s a simple one – if vendors ship late, either get free shipping, markdown money, or return the goods. Remember, shipping past a cancel date is something you do not have to permit. Cancel dates are the terms of the agreement, and if the vendor violates those, you have the right to either extra compensation or to cancel the agreement.
Here’s the tweak for this one—let’s lower the markdowns by 2%. Here are the results:
By implementing all three tweaks, we get the following increase in cash:
Let’s review the tweaks, and the benefits:
• Lowered Selling cost by 2%= $15,000
• Lowered Purchases by 2% = $15,000
• Lowered Markdowns by 2% = $7,500
We produced $37,500 on a $750,000 business. Not too shabby. And it didn’t come from a crazy new marketing idea, a revolutionary new line, or a magical new sales person. It came from looking at the details of the business. It came from watching the numbers, not only based upon what happened but what we planned to happen and working with the buyers, the vendors, and the store managers to bring that plan to fruition.
What if this were applied to your store? It’s worth a shot.