Estimating Profits for Each Product Category

Here is the fifth entry of the Twelve Components You Need in Your Merchandising Plan titled: Estimating Profits for Each Product Category

Unless you categorize your merchandise by department /suppler which can produce one hundred or more departments and be very difficult to manage, you probably have a limited number of categories.  If so, every category most likely has a few sub-categories that better group like products together. Sub-categories more closely group like items.  This is important because each sub-category can have a great impact on how customers perceive the selection offered.  Selection is the number one reason why consumers shop at retail. Grouping like items expands a selection. Knowing which items are most compelling to targeted customers is intellectual property that companies rely on to grow and improve product turnover and profit margins.  In general, each sub-category should have a product range based on design and style that complements a shopper’s interest. The more each sub-category specifically caters to targeted customers the more likely your selection will be more compelling to some consumers and less interesting to others. But wait! Your inventory can’t be all things to all people in 2009 because you are competing with other category offerings that do have expanded listings that have been customized to cater to the specific design and style preferences of targeted customers. The five and dime general store approach to merchandising luxury products is over . . . gone forever.  

Now that you have honed in on a particular approach to design and style in each sub-category consider the price range for these products.  Knowing the right price range is intellectual property that reflects your specific market conditions and buyers. It is the knowledge that drives your best merchandising decisions. Keep price points for the initial price mark up in mind as you select items. Make sure that products are identified for fast turnover and that proper policies are in place to minimize out of stocks. That includes reordering and getting individual products priced quickly once they arrive in the store. Some jewelers find that having supplier’s pre-price items helps reduce total out of stock time by reducing the pricing step after receiving shipments.

Think of the discounts your sales staff is currently relying on to make sales.  Even stores that do not publicly promote discounts find there are times when discounting is necessary. Project sales based on the discounted prices you estimate products will sell at.  If you have your choice between more margin and more turns what will you prefer? Start thinking more turns and accept the fact that more exciting hot sellers bring back more customers more often.  Of course, newer items will command higher margin sales and that also reinforces a philosophy of more stock turnover. The days of having items in the case for a year or more and waiting for the right customer are over . . . because your competition is not competing that way anymore. The cost to maintain non-sellable inventory is hurting the viability of too many jewelry stores.

Be aware of all of the costs associated with selling including items that are more likely to be put on credit cards, and consider loss and damage factors. Estimate total price discounts and consider other discounts such as employee discounts, and allowances and costs associated with selling each sub-category. Some categories are going to be able to generate more cash sales while others are going to be facilitated through credit card purchases. Keep track of these charges as they diminish the total contribution to sales. Some categories might generate more lost stock or unsellable merchandise due to damage, etc. Keep track of all means of reduced value and know what the total contribution to sales is for each sub-category and category.

Your ability to estimate profit on a per sub-category basis is a means to understanding how to best grow your business.  Too many jewelers don’t know what items to keep in inventory, which ones to reorder or not reorder and which ones will require the most discounting resulting in less profit margin.