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What is considered a healthy gross profit margin (both as a retailer and a distributor)?
I have just started a niche business of importing foreign goods at factory prices direct from the manufacturer and selling them at my retail shop at an average markup of Landing cost x 2 + local taxes or at a margin of ~50%. I have a retail shop and I also sell to institutions (training institutes) who want to provide their students with my products. More often than not, these institutes expect to earn a big margin sometimes 20-30% on their order which I wish were huge. I also sell some local niche brands in my shop on a consignment basis and I pay the vendor at month end the sales – my margin.
I need some advice on:
- is the markup of 2x or margin of 50% healthy comparable to the retail industry or am I underselling?
- With institutions what model should I follow (a) give them a discount on every purchase (b) let them take my imported branded goods on a consignment basis and pay me monthly based on their sales.
- Am I a retailer or trader? Mind you the institutions have no retail background and are generally unprofessional when it comes to taking responsibility of my products on a consignment basis. I am better off selling to them at a discount and not worry about the sales. I like to think I am more of a Retailer who wants to reach the customers directly offline and online.
Any other advise on how to move forward to increase sales and turnover via tuning pricing model and giving incentive scheme would be greatly appreciated.
Thanks for the detail in you questions. Let me take them one by one.
Markup of 2X, or 50% margin to you, is generally normal. It really depends on your category of products and what channel you are in. But as a general rule, for specialty retail stores, which I am guessing you fall into, margin is 50-65%, then drug at 42-45%, grocery at 35-40%, mass at 25-30% and club at 14%.
Regardless of the margin, your next question, whether you are underselling, is really the crux and it comes down to what the market is ultimately willing to pay for the product. Do research on competing products in other specialty retailers like you to get a sense for price. It could be that you really should be charging 3X and a 100% margin, or maybe the market only gives you a 1.5X for a 33% margin, which means maybe you need to try to negotiate lower costs from your manufacturer to get 50%. Maybe competing products are a 2X, but your’s is a better quality or has other value added features and benefits that justify a 3X.
Next, about sales to institutions. My recommendation is to sell to them such that the price they charge to their customers is about the same as the price you charge to your customers. The reason being that you do not want to cannibalize sales from one channel (let’s say them) to the next (let’s say you) due to huge price variations, which ends up irking the losing party (them). It may not be a big deal at all because maybe your customer base is entirely different from theirs, but overall, you want to try to maintain a level of fairness in pricing so that it won’t come back and bite you later on. Let’s say market price is 2X, or 50% margin; they get 30%, and you take 20%. That is actually a fairly common spread between a distributor and end-retailer where the distributor is involved and not the manufacturer doing the direct shipping/selling.
I would sell to them on a net 30 basis, or net 15 is even better, or upfront, if you can get away with it. Why take the risk that they will not sell if on consignment and then you have to take back the product if it does not sell? Try to stay away from any discussions like that. Also, they might want guaranteed sale – if the products do not sell, you agree to buy back. Try to stay away from those discussions, too. Focus on selling them what they need, at a fair price, which they can resell for a fair profit. If they end up wanting 30% and you end up with 20%, but they are happy and selling for you, that sounds like a good deal for you.
You are both a retailer and a distributor, as far as I can see.
Your last statement puzzles me a bit. Are you asking all these above questions to increase sales and turnover? If so, in general, lower the price, or tack on some value-add to what you are selling to sweeten its appeal, or focus your marketing to the right niche/tribe that wants what you have. A better question may be, how do you maximize profit? There is probably a balance where at a certain price, you are able to achieve a certain volume that maximizes your profit. To get there really takes some competitive research that I mentioned above and then some testing on your side. If you are able to test pricing from one week to the next without the same consumers finding out and getting irked because they paid a higher price, that is the a great way to find out. In addition, marketing to the right customers so they buy it from you is also important.
To increase sales/turnover/maximize profit through your resales to the institution is hard for you to do because it’s their customers, not yours. However, you might help that by partnering with the institution to offer a discount (they pay half, you pay half). This is called marketing co-op, which is standard in retail between the manufacturer and the retailer. Or, can you tack on some sort of mail-in rebate that the institution’s customer redeems directly with you (manufacturer coupon)? Maybe you pay for some other marketing that happens between the institution and their customer.
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