Profitable Times Newsletter

Some Keys to Successful Cultural Commerce

Successful cultural commerce management is a combination of art (product selection, merchandising, display) and science (the numbers). If sized and located properly and managed well, your shop can be a significant source of revenue, a public relations asset and a repeating delight for visitors, members and all other customers. The focus of this article is on the most impactful financial and product selection things you can do to make your existing shop a success.

Not all factors are equally important for all institutions. Some ideas may be difficult for certain institutions to execute because of a variety of constraints. However, for the most part every idea, with some modification, can be applied to nearly all existing operations to increase profitability. I suggest you use the following as a checklist of these opportunities.

Inventory Management

Perhaps the most important operational requirement for a financially successful store is the management of inventory, typically the largest expense category, primarily through the consistent use of a merchandise buying plan, commonly known as an Open To Buy (OTB). The OTB is the process of projecting sales and inventory levels for a future period, perhaps 12-15 months or more, and then calculating when and in what quantity merchandise should be purchased and delivered to meet these sales goals.

When I have been engaged to assess an existing shop with lagging profits, the inconsistent use of an OTB is a frequently identified culprit. And where an OTB is not being used, the result is very often a bloated inventory — equivalent to wasting precious cash reserves. In my opinion, regardless of how big or small the garden retail operation, an Open To Buy should be established and used consistently.

Use of an OTB helps to determine how much product is needed to meet expected sales. If sales are more than expected or inventory lower than it should be, it will help to project how much additional product to buy to meet the increased demand and keep the shop looking lush, full, rich, warm and inviting. Most importantly, however, if revenue is less than expected or inventory is too high, the OTB assists in determining how much to slow down buying in order to reduce the possibility of having too much product on hand. The consistent use of an OTB also assures less interruption to a critical segment of shop operations should the manager / buyer suddenly be unavailable.

No discussion of inventory management can exclude addressing how to handle inventory that by plan or circumstance is available in multi-year quantities. Although all inventory must be reported for tax and other purposes, it is recommended a 'virtual' warehouse be established to house the inventory for products such as books, postcards and other proprietary and purchased products, that will be sold over an extended time period. The goals of this virtual warehouse are to:

  • Relieve the immediate store inventory of excess products for the purpose of calculating the OTB
  • Allow the store to 'buy' products from the virtual warehouse as needed
  • Highlight the status of, and assign responsibility for, multiyear inventory

Invest in a Computerized Point of Sale System

In general, a strong ROI case can be built for investing in a computerized point of sale (POS) system when net sales reach $125,000. At this sales level savings from better inventory management, including quick identification of and reaction to bestsellers and slow-selling products, will recapture the investment in an acceptable period of time.

Choosing the right system can be difficult. My suggestion is to consult similarly sized retail businesses in your area (not just other cultural institutions) for recommendations. There are many factors to consider, but don't forget to evaluate ease of use at the point of sale, especially if you have volunteers on staff, and local service representation. Also, in order to avoid finger pointing when your system goes down — and it will — buy your software and hardware from, and have it installed by, the same company.

There is strong movement toward systems that integrate admissions, membership, group sales, development, volunteer tracking, accounting, class registrations, retail and other functions. When evaluating these systems from the shop perspective, make certain the retail module is strong. Retail, requiring the management of hundreds to thousands of different products and the tracking of multiple aspects of each product, is typically the most complex segment of integrated systems. At this time, the retail component of most integrated systems is their weakest link.

Retail Pricing

The consistent retail pricing of products that are not pre-priced is essential in any profit-enhancing effort. If insufficient profit margins are generated at the top of a profit and loss statement there is little chance of having sufficient revenue to cover the costs reflected in all the other line items.

The critical steps to maintaining margins and lowering the Cost of Goods Percentage, typically the biggest expense item, includes determining the retail price before buying a product or making sure the pre-established price is sufficient to maintain desired margins. Multiplying cost times 2.3-2.5, is a way of calculating an initial retail price. (Books, especially, are a frequent exception to this guidance.)

After making this calculation mostly keep the retail price in that range. However, if perceived value and competition allow, increase the price to what the market will bear. If perceived value and competition require, and the product is important to the mission-related product selection, lower the retail price to an acceptable level. Pricing below doubling of cost should be a rare and strongly justified occurrence. The initial markup includes covering standard freight-in. The retail price should be increased for extraordinary freight costs. If a potential product doesn't meet markup parameters, look for another product that does before pricing at a lower price.

Focus the Product Selection

The product selection should mirror the strengths of the institution and must reflect the profile of visitors, members, volunteers and other customers. Perhaps the most important requirement to meet is Unrelated Business Income Tax (UBIT) guidelines. I am not a tax accountant but in general UBIT guidelines allow profits generated from the sales of merchandise to be free of federal income tax if the merchandise is closely related to the mission of the institution or a current exhibit. UBIT requirements actually are easily met and can help encourage store management to keep merchandise well focused.

Merchandise focused on the mission not only limits UBIT exposure, but creates a retailing environment that makes each site unique and more appealing to the customer. Even if it were not a tax code requirement, keeping the product selection focused on the mission of the institution is a key ingredient in creating a compelling retail atmosphere.

The most popular product categories across most cultural commerce venues are:

  • Apparel
  • Arts & Crafts
  • Books, Magazines and Other Publications
  • Children's Merchandise including Activity Kits
  • Convenience, Novelty, Souvenir, Impulse, Tchotchkes
  • Food
  • Gifts, Home Décor, Tabletop, Desktop
  • Jewelry*
  • Original Art (two and three dimensional)
  • Prints, Posters, Note Cards, Postcards
  • Reproductions (two and three dimensional)
  • Stationery

*Jewelry is often the best selling and highest margin product selection in the shop.

Within your selection of products become known for something. Develop one to three product categories that because of the depth, breadth, or unusualness of the selection it is a category for which the shop has a reputation.

In summary, if you focus on what the customer wants to buy, price it properly and carry a financially appropriate level of inventory, you have taken critical steps necessary for a profitable shop that also enhances the visitor experience. To be clear, this does not mean that proactive selling, product knowledge, compelling merchandising and display are not important — just not addressed in this article.

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