Retailers often think the next boost in their business is going to come from finding a new, amazing line of merchandise or discovering a leading-edge marketing tool. Sometimes they believe it will happen if they hire a seasoned salesperson. And they always hope new businesses will fill vacancies around them, as that will bring more customer traffic to the area.
The problem with these ‘solutions’ is they are external to your business. You cannot predict or control them, nor can you invoke them when you need more cash. Given this, they shouldn’t be your primary focus.
Instead, there are small tweaks you can make that will have an enormous impact. They are easy to implement and if done properly, will bring about tremendous change.
Adjust Selling Cost
Most retail businesses operate on some form of base salary plus commission structure. Many stores pay commission on the first dollar sold. This should not be done; salespeople should be required to hit a goal before receiving commission on their sales. What’s more, this type of commission structure does not keep your cost of sales in line. Let’s tweak that and see the results.
First, a definition. Selling cost is defined as the percentage of sales that go to pay your salespeople. The formula is total cost of sales (including salary plus commission) divided by total sales (before tax). As an example, if you have an employee whose payroll cost is $1,700 a month, and that employee sells $12,500 in merchandise, then the selling cost for that employee is 13.6 per cent.
Now, what if you have a commission plan that keeps the selling cost at nine per cent?
You would then take the hourly wage for your employee and divide it by 0.09. That number is the employee’s hourly goal. So, for example, if you have an employee that is paid $10 per hour, their hourly goal is $111. In other words, they must sell $111 in merchandise each hour they work.
Next, take that hourly goal and multiply it by the number of hours worked in a week. If the employee works 30 hours, the goal is $3,330. Once hit that week, the employee is paid nine per cent on all sales above $3,330. This provides an incentive to sell, gives the employee a good commission and keeps your selling cost low.
Lower Purchases
Lowering your purchases to save money seems easy enough but it requires some thought and planning. Specifically, you need to find your competitive advantage in the marketplace and how you can exploit it. You can then determine the classes/departments you will grow and those that are carrying more inventory than they should and need to be cut back by a percentage, for example, two per cent. This can be done systematically by employing an open-to-buy planning system. Open-to-buy is an inventory management strategy that helps retailers understand how many products they need to purchase, preventing overbuying and underbuying. Using this method, stock levels should correspond with most recent sales trends.
There is a reason every major chain, big-box store and large retailer uses an open-to-buy plan — it creates cash flow for the store and customers come back more often to see what is new. Most independent retailers cannot afford to purchase open-to-buy software that includes sophisticated forecasting and planning tools, but there are services that can help.
Modify Markdowns
The majority of small-sized retailers do not have a solid markdown strategy. Goods need to be given sufficient time on the floor to sell, but after that the slow movers need to be identified to get cash out of them. The earlier this is done, the lower the markdowns and the better chance of moving the products faster.
Markdowns are necessitated by a receipt of late goods, overbuying beyond demand, inadequate class/department structure, bad forecasting or buying, too broad or narrow of an assortment, failure to act early to substandard sellers, poor performance on the sales floor, production issues with the merchandise and salespeople not understanding or not liking the product.
Strategies and measurements can be developed to reduce or control all of these factors. For instance, if a vendor ships late, you should request and receive free shipping, markdown money or be able to return the goods. Remember, shipping past a cancellation date is something you do not have to permit. Cancel dates are terms of the agreement and if a vendor is in violation, you have the right to either compensation or to terminate the agreement.
Also, watch your sales floor and make sure employees have sufficient product knowledge so they can effectively sell the products. If a new product comes in, your sales staff needs to become instant experts on it. Request that vendors/manufacturers share all information on a product, as it’s critical to your staff’s ability to talk to customers about the product and ultimately sell it.
Dan Jablons is president of Retail Smart Guys, a provider of consulting services to specialty retail stores. Dan brings many years of retail experience to any size store to improve their operations, revitalize their marketing and maximize their profits. He can be reached at 818-720-2585 or [email protected].