Catherine Edley [00:00:00]:
You can have amazing sales and still not make money. Because what really matters. Spoiler alert. It is not your top line sales. And that’s what we’re talking about today. We’re going to be delving into the importance of profit margins. Welcome to the Resilient Retail Game Plan. I’m Catherine Edley and in the next few minutes, you’re about to get powerful real world retail strategies from insights shared both from my guests and myself, backed up by my 25 years in the retail industry.

Catherine Edley [00:00:29]:
Keep listening to learn how to grow a thriving, profitable product business. Let’s jump in with this latest episode. We’re going to be going over what exactly profit margins are and the two different types that I like to look at, why they matter so much and what you need to do if yours aren’t high enough. So let’s start off with basic definitions, often a confusion between markup and margin. And basically, I always like to look at profit margin, but you may be more used to looking at markup. So markup is basically if you take the price of an item and then multiply it by a certain number. So if you buy it for £5 and you sell it for £15, that’s a three times markup. But personally, I like to look at your profit margin.

Catherine Edley [00:01:17]:
And the way I like to look about your profit margin is I like to think about it like a cake. So it goes something like this. If you sell an item for £12, imagine that £12 is a whole cake. If you’re VAT registered, then £2 goes straight to HMRC. And then you’ve got your product costs, your materials, your packaging and your transaction fees. Now, if you’re not sure what you need to take out in terms of what’s a product cost, here’s a question. If I sold twice as much, would this cost go up? But if, because this is an area where people get confused with their profit margins, they’re not sure if they should count something as a product cost or an overhead. So that’s the question I always get you to ask yourself.

Catherine Edley [00:02:02]:
If I sold twice as many of these, would it go up? So your rent, for example, if you sold twice as many products, that’s not going to change. So that’s an overhead. But your packaging, if you sold twice as many products, you’d have to spend twice as much on packaging. So that is a product cost and what’s left after you take out that slice of the cake for VAT and the slice of the cake for your product cost is your gross profit. And we use that to calculate what percentage of the cake is your gross profit. So if you sell something for £12, take off the VAT. We always calculate margins, excluding VAT. So you take off the, the £2, you’re left with £10.

Catherine Edley [00:02:44]:
If you have costs of £4 and, and you’re making £6 profit on this item, then your profit margin is 6 divided by 10 and that is 60%. It’s really useful for you to understand what that is, especially for your best sellers. So why do margins matter? Why do you need to know how big your slice of cake that you’re left with at the end is? And there are a couple of really fundamental truths about running a product business that mean that your profit margins are absolutely critical. In fact, I go as far as saying that they are the building block that you need to focus on for your business. So the first thing is that there are really two key indicators for the success of a product business. To figure out whether or not a product business is going to be profitable, there are two things that you need to take into account. Number one, how quickly you’re turning your stock. So how quickly you get your money back once you have paid out for stock, the faster that is, the more profitable a product business.

Catherine Edley [00:03:46]:
And the second thing to consider is, are you making enough money every time you make a sale? In other words, your product margins, your profit margins. So if you’re not making enough money every time you make a sale and you have got too much stock or you’re not getting your money back quick enough from your stock, it’s very hard for you to build a profitable product business. So profit margins are one part of that very important underpinning principles that really will help you figure out if you can build a profitable product business. The second thing about profit margins, and the other reason that they are so important is because in your whole business, in everything that you do in your business, there’s only one place where you generate profit. And that is the difference between what you buy something for and what you sell it for. Every other expense in your business has to be covered by that difference. So if that isn’t big enough, that’s why it’s one of the fundamental building blocks of a product business. If that gap isn’t big enough, if you’re not making enough profit every time you make a sale, then you’re going to really struggle to build a profitable business.

Catherine Edley [00:04:52]:
And this is true when you think about people like Marks and Spencers. So Marks and Spencers, they have millions of pounds A year of sales. They have thousands of people who work for them. They, they have millions of pounds worth of stock and they have hundreds of stores as well. All that infrastructure, all of those lorries, everything that you can think of, that is all paid for by the difference between what they’re buying their products for and what they’re selling them for. And profit is the engine of your business. If you’re not making enough profit, you’re going to really struggle to do things like pay yourself or, for example, get help in to help you scale, scale and grow. So understanding your profit margins is absolutely crucial because it’s the only place you’re actually generating profit.

Catherine Edley [00:05:41]:
Everything else in your business is an expense. I like to think about profit margins in two different ways. We have got your in margins and we have got your out margins. So an in margin is, as the name suggests, what happens as something comes into your business. And it’s what you should make when you buy stock. So, for example, going back to our first example, let’s say you have a mug, you sell it for £12, and again, taking off the VAT and taking off your product costs, you’re making six pounds. So the ideal is if you sell it for 12 pounds, you will make six pounds profit, which will, once you take off the VAT, works out at a 60% in margin. So that is effectively theoretical because when you go and place that order, your intention is to sell it at full price, which we should all be really, I believe, operating from the intention to sell everything that we buy in at full price, even though we know that’s not how it always works out.

Catherine Edley [00:06:45]:
But that should be your intention. And then your out margin is what you actually make. So this can be something that you can look at maybe once a month, once a quarter, once every six months. And basically you have a look at all of your sales. Often the best place to look for this is actually in your accountancy software. So whether you’ve got Xero or Whether you’ve got QuickBooks, it’s actually quite helpful to have a look there and see if you can get hold of what they call the cogs, the cost of goods sold. So then you’re able to say, right, these are all my sales net off the costs of goods sold. And what you’re left with is your overall gross profit margin, which is effectively telling you after the fact.

Catherine Edley [00:07:28]:
So a historical number, what your actual sales margin was. And this also is a number that takes into account things like your discounts, any offers that you do, any price cuts, that you put through on your products that will have an impact on the difference between your in margin and your out margin. Because there are some people who buy everything in a really decent profit margin, maybe 60%, 70%, but then the out margin is actually quite a lot lower. That’s usually because they are over relying on discounts. However, I do have to say, if you’re in margin, so that theoretical margin that you use when you set your prices and you look at the price that you’re paying for a product, if that is not high enough, then you’re only going to run into even more problems when you look at your out margin. Because your out margin is always going to be lower than your in margin, your in margins the highest that it could possibly be. And your out margin is the actualized. So the in margin truly is that building block.

Catherine Edley [00:08:28]:
If that number isn’t high enough, if your margin isn’t high enough at that point, then you can’t make your out margin better than your in margin. So you can’t really compensate with your out margin. You need your in margin to be right to start off with. So what? Some of the margin mistakes that I see people make, this is a topic of conversation I have with so many different clients, so many different people. And I would say that the main issue that people have is that they miss costs. So when they look at their profit margin, they actually don’t have the full picture. Now, to be fair to most people, that’s because if you think about all of the different elements that go into making up a cost price for a product, then often these are coming in on different invoices. Even if you’re just buying the product from somebody else.

Catherine Edley [00:09:25]:
You may also have to pay freight, you may have to pay duty, you may have to pay packaging to send this product out to customers. You may have fulfillment fees. You may have an element of your own time that you’re making. And if it’s something that you’re making, it’s even more complicated because you may be using four or five or six, six different elements and then also your time on top of that. So figuring out how much each one of those costs you as a single unit and then working with that information to calculate your profit margin for the whole product, that’s really important piece of work because otherwise you just don’t have clear visibility at all. You’re left kind of wondering whether or not you’re making enough profit because you’ve never broken it down to a single unit. And what I mean by that is Is if you have an invoice for £1,000 and that is for 2,000 boxes, for example, you need to work out that then each box is costing you 50p. And do that for every single element related to a product so that you can figure out for that particular product how much money you’re actually genuinely making.

Catherine Edley [00:10:31]:
Because one of the things that happens when I work with people, sometimes we do this exercise and we realize they’re just basically not making enough profit. And therefore that means that they’re putting all of this effort into building their sales. But it’s feeling really pinched and it feeling like there just isn’t enough profit in there for them. If it makes you feel any better, this is not an issue that is restricted to small businesses. I have worked for big businesses where they have actually not looked at their shipping costs. For example, they’ve looked at a product and they’ve looked at the product costs. But because the shipping team were the people who managed all the shipping costs, they actually were in a situation where the product wasn’t actually profitable. But nobody realized until they put two and two together.

Catherine Edley [00:11:16]:
Because the item was a big bulky cushion that was coming from overseas, it was actually so expensive to ship that once you factor that in, it was selling at a loss. So bear in mind all of the work that had gone into creating that product, all of the money they’d spent on buying it, shipping it over, they actually would have had more profit if they hadn’t sold it, which is really quite a depressing thought. So it’s not just something that happens in small businesses. Big businesses do slip up as well. But generally speaking, it’s an exercise that you want to make sure you’re doing at least for your best sellers, because I know it can take a lot of time, but if, if you check your best sellers, then that’s a really great place to start. Other issues with margins over discounting. So constant discount codes really hits your profit. So I am not a fan of blanket discounts.

Catherine Edley [00:12:06]:
So 20% off everything, 30% off everything. You need to really minimize the amount of discounts that you are giving out. Sometimes we’ve even done this exercise where we’ve looked at your profit margins for products and then decided actually we can’t even really support, or we don’t really want to support the 10% off everything welcome code, for example, that a lot of people have to drive signups to their email list. So there’s a lot that we can do. Once you’ve really got a handle on your margins, you can really assess what is going on as well as try and clamp down on that overuse of discounting other mistakes I see people make not reviewing your prices often enough. In an age of rising costs, you need to be checking at least every three months and making sure that when you’re getting those invoices in from your suppliers, if you’ve done this exercise before, if you’ve broken everything down to a single unit, is that still correct? Costs have been going up across the board. It used to be that I would suggest to people to maybe review their margins once or even twice a year, but now I really think that about every three months need to be double checking. Or even every time you get a new invoice, just double check what it’s telling you and see what impact it’s having on your margins.

Catherine Edley [00:13:23]:
Another issue that I see people having with their margins is that they’re not putting their own time in if they are a handmade business. So if you are a business where you either make the product entirely or there’s an element of which you are making the product yourself, you need to make sure that you factor your time in. And the way that you do that is you work out. One hourly rate would be either for yourself or what you would have to pay somebody else to do this. You work out how long it’s taking you, and then you add that in to the cost price so you can get a genuine idea as whether or not something is making enough money. It’s really important to do this, because if you don’t do this, what happens is as you grow and scale, you’re going to get into a situation where you actually can’t afford to pay somebody else to make this product for you. And in which case you just are going to be forever restricted to the amount that you can produce. And also the reason you need to do this because otherwise you’re effectively saying you’re happy to work for free.

Catherine Edley [00:14:22]:
And you may be keeping your prices unnaturally low because you’re not paying yourself. Another issue I see in the same way as people, people don’t review the cost of the item or the cost of all of the different elements that go into a product. People often don’t review the retail price. Sometimes if you’re a bricks and mortar store, for example, and you’re effectively reselling products, generally speaking, you also do need to just keep an eye on the recommended retail price. I did an exercise once with a bricks and mortar store, and we realized she’d actually not put through some recommended Retail price increases, which meant that she was inadvertently undercutting other people and also selling herself short on the profit margin because the brand had put up their cost price at wholesale. But she hadn’t tweaked that she needed to increase the retail price as well. So that is something that can catch people out. And so much margin is about really keeping your eye on it and really making sure you are optimizing for margin.

Catherine Edley [00:15:31]:
So what is a good margin? This is a question I get asked a lot and I would say that if you’re below a 50% margin, so we’re talking about the difference between what you’re buying the product for and what you’re selling it for. If that’s below 50% to start off with before you factored in other costs like your fulfillment or your packaging, things like that, you’re going to struggle to grow profitably. There are a few exceptions to that. There are people who have got really high priced products, for example high priced jewelry, high price dresses, high price furniture, that maybe the profit margin percentage isn’t great, but each item is generating several hundred pounds. Those ones, perhaps you can get away with being below 50%, but I would say for most people, if you’re below 50% before you’ve factored in your other costs that you’re packaging fulfillment, then you’re going to really struggle around 50% is pretty typical for a lot of people who are reselling most wholesale is set up, the pricing is set up so that the retailer makes a 50% margin. So that is what you would expect it to be at. And that is again something that is generally doable. You do need to keep an eye on your discounting to make sure that your out margin isn’t really cutting into that.

Catherine Edley [00:16:47]:
And for example, you’re buying everything at 50% but your out margin is actually 35, 40% because you sell so much at discount. So you do need to keep an eye on it. But Generally speaking, around 50% is pretty typical for retail if you want to wholesale. So if you’re somebody who makes or manufactures your own products and you would like to sell them at wholesale and to other retailers, you really need to be looking at something like a 65 to 70% margin at retail to have a hope of making any money whatsoever when you’re selling it at that lower wholesale price. And generally I’d say the higher the better. So if you can get it to 75 and that would be ideal, but much below 65 and you’re going to really struggle to make any money whatsoever on a wholesale basis. What do you do? If you do all of this piece of work and you analyze your margins and then you work out that they’re too, too low? Well, this is something that happens. And the first thing I’d say is don’t panic.

Catherine Edley [00:17:47]:
Knowledge is power. It’s really important for you to understand where you’re at and then have a look and see how you can optimize. So the first thing is check all of your top sellers, because your best selling items have a disproportionate effect on your overall profit margin. So if they’re at a decent profit, then it will help lift your overall profit. So if you don’t have time to go through absolutely all of your products, make sure that you double, triple check all of your best sellers, using a margin calculator to have a look and see where they’re at. Can you have a look at your pricing? That’s usually one of the last things that I suggest that you do, but it’s always good to just double check that you have actually matched the recommended retail prices. If you are somebody who has a lot of discounting built in, so lots of offers in your email sequences, lots of welcome discounts, things like that, you’re somebody who runs a lot of offers, so you run a lot of 20% off this, 20% off that, then can you really look at removing or limiting them, pulling them back? Are there other options? For example, is free shipping something that is a slightly less of a hit to the margin than a 10% discount, for example, like what could you offer as an alternative? You can have a play around with that. And also just having a look in general at your discounting strategy, can you really pull back? Also have a think about your free shipping limit.

Catherine Edley [00:19:13]:
If you’re offering free shipping but it’s actually costing you a lot of money, then is that something that you can play around with? Maybe you change it so that you’re not offering it to everybody. It’s only on orders over a certain value. For example, if you’re offering shipping for £2.15, it’s actually costing you 4.99. Is that something you can play around with and play around with that setting? These are all different things that you need to take into account to make sure that your overall business model is healthy and set up for long term success and that you don’t have these various different places that are eating away at your profit. Sometimes I’ve worked with bricks and mortar where they have a really high proportion of Sale or return product, for example, because sale or return is at a lower margin, generally speaking, than wholesale, then we’ve been able to successfully transition them out of some of their sale or return into more wholesale change that mix over and drive their profit margin up that way. So there are lots of different things that you can do if you are in a situation where your profit margins are lower than you would like. But the first step is really getting a handle on them and understanding where you’re at right now. Make sure that you regularly check your costs and review every three to six months to make sure that things aren’t going adrift.

Catherine Edley [00:20:28]:
So there you have it. Healthy profit margins. This is not about being greedy whatsoever. And I think one of the things that’s really funny, when people first start in retail, often people are shocked or people who maybe don’t understand as much about product businesses, that they may be shocked to hear how much people sell things for when they buy them for much less. But I think that once you factor in all of those other costs that have to be covered by the difference between what you buy something for and what you sell it for, then it starts to make more sense. It starts to seem a little bit more reasonable and it’s something that you really need to watch. Big retailers, they obsess over margin. They have whole teams of people who all they do all day, every day is look at their margin is something that I used to have to do when I worked in corporate retailers.

Catherine Edley [00:21:18]:
I’d have to report to the CFO every month and tell them what the margin was. And spoiler alert, I was never allowed to just say, oh, it’s decreased. We always had to work to bring it up or keep it level. Margin’s not just a number. It’s the best signal that you’ve got in your business for how things are going in terms of profitability. And profitability is the engine that allows you to pay yourself, to grow your business and to avoid burnout. So if you’re wondering how to work out your profit margin, then if you’re a club member, within the Resilient Retail Club, we have a margin calculator. If you have bought my book Tame your Tiger, then you will also have access to the Tame youe Tiger toolkit, which contains a margin calculator as well.

Catherine Edley [00:22:01]:
So do hop over to Instagram. Let me know at Resilient Retail Club how things are going for you. What are your challenges with your profits? Have you calculated your profits? Were you surprised by it? I’d love to hear what’s going on for you and what your profit margins look like and where your challenges are. And if you’re wondering how this all relates to pricing or if pricing is something you’ve got a big question mark about, then stay tuned for next week episode where we’re going to be delving into profitable pricing and the value triangle. See you next week.