Profitable Times Newsletter

New Year's Resolutions

Three, (Plus One) Things You Can Do to Make 2001 a More Profitable Year

If you do just these three things (Plus One) differently in the New Year, you will increase sales and put more money in your pocket.

1. Religiously Follow a Merchandise Buying Plan

Regardless of what you call it — merchandise buying plan or open-to-buy — the goal is to plan your merchandise purchases so that you devote less of your capital to inventory, generate more sales and increase profits. In its simplest terms, a merchandise buying plan helps you to determine what you need to spend on merchandise in this time period, to meet your expected sales in future time periods.

When I am hired to do a store review, the most frequent and serious profit-draining problem I find is a bloated inventory. Almost without doing an analysis, you can tell when a store has too much inventory. The key visual signs of an inventory imbalance include a store too full of merchandise; much of the inventory looks out of date, dusty or old; you ask to use the rest room and it's full of merchandise or the owner/manager/buyer doesn't plan to go to the next show because they "really shouldn't spend any more money on inventory."

What are some of the advantages of using a merchandise buying plan?

  • You can use the same inventory dollars over and over again during the year instead of constantly putting more money into inventory. Basically, this is a description of inventory turnover. Inventory turnover is really a measure of how hard your inventory dollars are working for you; i.e., how often each inventory dollar is used per year to buy merchandise. When we think about turns, it is easier to visualize how many times we have reordered certain merchandise than it is to visualize dollars being reused to buy that merchandise. It is the efficient use of inventory dollars, however, that increases sales and profits.

  • If you consistently have sufficient dollars to spend on inventory your stock will look fresher, be more in tune with current trends and more appealing to your customers... and this almost always results in greater sales.

  • The greatest expense in all retail operations is the cost of goods and related markdowns. If we can tweak that expense just a little bit, maybe one to two percent, the savings will fall immediately to the bottom line as additional profit. If your stock turns over quickly, looks fresher and stylish and as a result sells better, there will be less need for discounts and sales, and your gross margins will improve.

  • Finally, and it may be a minor advantage in many stores, but the proper use of a merchandise buying plan will lessen your need for storage space and possibly allow you to convert some expensive storage space into profit-generating selling space.

Let's see — less money spent on inventory, greater sales, better margins and space possibly converted from storage to selling. Sounds like a profitable combination to me!

2. Market to Your Best Customers

  • 70% of your business probably comes from 30% of your customers.
  • It costs five times more to find a new customer than it does to retain a current customer.
The consumer who has entered your store and made a purchase, thus becoming a customer, is your best future customer. You should make every effort to capture their name, address and possibly their telephone number and a little about their preferences.

While the guest book approach has a warm and fuzzy feel to it, the two best ways to capture the names and addresses of your highest quality customers includes copying addresses from checks and individually handing out mailing list cards to selected customers.

So many times I have seen stacks and stacks of mailing list cards that have never been used and guest books filled with names that have not been contacted. The sheer number of names and the cost of contacting them (printing, addressing, postage) is overwhelming. I suggest you print a very nice looking mailing list card that includes long and widely spaced boxes for name, street address (2 lines), city, state, zip code, telephone number, fax, email address, and some extra space for comments about the customer's preferences. Instead of stacking these on your checkout counter, hand them to special customers or those whom you suspect could become special customers. Explain to them that you advise the special customers on your mailing list about in-store events, customer previews, special purchases and sales events, and that you will not trade or sell their information to anybody.

This isn't rocket science. If you build a limited list (limited to what you can handle both financially and in terms of the work required) of special customers, to whom you mail on a regular basis, you will generate far more business than what will come from that extraordinarily thick stack of cards that hasn't been processed or by mailing to an unfocused collection of names from a guest book.

3. Keep Some Basic Numbers About Your Business

Knowing how you're doing isn't just a matter of keeping track of your checking account balance at the end of the month. Admittedly that's important, but it doesn't tell the whole story, doesn't enlighten you about how you got to where you are, and it certainly doesn't give you any information about how to do better.

Here is a short but critical list of some of the most basic numbers you should keep on a daily basis and what to do with them:

The Numbers

  • Net sales* (A)
  • Number of transactions* (B)
  • Total salespersons hours worked in a selling capacity (C)
  • Number of people entering your store (D)

*If these numbers can be broken down into time segments during the day they will be even more valuable to you.

The Calculations and What They Tell You

(1) Average Sale =
(A) Net Sales

(B) Number of Retail Transactions

This is a measure of efficiency (how much revenue are you generating for the effort expended with the customers) and the appeal of your product mix (the more the customer likes, the more they will buy). This number should be in a steady upward trend (adjusting for seasonal variations) blending, among many factors, inflation, more attractive merchandise, better placement of impulse items, improved customer service and sales techniques, etc.

(2) Transactions per Hour Worked =
(B) Number of Retail Transactions

(C) Number of Hours Worked

The best gauge for measuring the number of staff you need to handle your volume of business is the number of transactions handled per hour worked. This measures the work actually being done better than dollar sales, which can be unduly influenced by extraordinarily large transactions. While you want this number to be as large as possible, possible reaches a point of diminishing returns if you don't give the customer enough service, resulting in lower total sales and deteriorating other measurements.

(3) Capture Rate =
(B) Number of Retail Transactions

(D) Number of people entering your store
(4) Sales per Potential Customer =
(A) Net Sales

(D) Number of people entering your store

All stores, regardless of type, are in competition for a fixed number of customers and dollars. The percentage of people who cross the threshold into your store and make a purchase, is a reflection of all you do (store ambiance, product selection, marketing, perceived value, customer service, window appeal, etc.). The better you do what you do, the more customers you will capture. The two calculations above will help you measure your appeal and performance.

Plus One — Follow Through!

The path to you-know-where is paved with good intentions.

NIKE® says it best: Just Do It®

These are not difficult commitments to make or to keep, and doing so will put more money in your pocket... quickly. If you treat your store like a business you should do these three things starting today. It pains me to see owners, managers and buyers who attend my seminars, comment about how pertinent the ideas are to their business, and then do nothing.

Rank the three New Year resolutions and start working on one today. It will make a profitable difference.

See the complete list of Profitable Times™ Newsletters.


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