Margin Magic: Four Steps to Building Greater Profit

In times when response rates suffer and average order values decline, earning a profit in cataloging can be more of a challenge than normal. In this environment, your expenses (e.g., marketing costs, overhead, fulfillment) become a larger percentage of sales, thus leaving few, if any, percentage points left for profit.

Although there are many things you can do to check overhead expenses and keep marketing costs at a minimum, there’s one line on your profit and loss statement that can have the biggest impact on your ability to make money: cost of goods sold (COGS).

Before taking the steps to improve your margins, you’ll need to understand their building blocks.

Markup and Margin

The inverse of COGS is the margin. It’s calculated by taking 1 - (cost / retail). Some also refer to this as markup. However, the markup and margin are two different yet related numbers. The markup is expressed as a multiple of the retail price over the cost (1.0 would be selling at cost). The margin is expressed as a percentage of the difference in the retail price over the cost (0 percent would be selling at cost).

A retail operation’s margin dollars become the pool of money from which all other expenses and potential profit will come. Essentially, the sales line doesn’t really matter, and all eyes should be on the margin line.

Typically, a catalog operation works on a slightly higher margin percentage than a retail store. A common retail margin is 50 percent, which frequently is referred to as “keystone.” This means the retailer is doubling the cost for the retail price. However, the marketing costs of catalog operations (mailing expenses) normally are greater than the marketing costs (advertising) for retail operations of comparable sizes, and so common catalog margins are closer to 60 percent.

Another important aspect of managing the margin is the dance between margin dollars and margin percentage. Controlling the overall margin percentage obviously is important and can be achieved by watching the margin percentage of every item offered. But it’s the margin dollars that pay the bills - more margin dollars will leave more to cover expenses and profit. Therefore, blending the importance of both aspects will lead you to vary the margin percentage for different items based on price points, product trends, product lifecycles, etc., in order to deliver the most margin dollars possible.

Now that we’ve established what the margin is and the role it plays in the success of your catalog operation, let’s examine ways to improve it and increase the bottom line.

Methods That Can Help Improve Your Margin

1. Reduce product costs. One of the quickest ways to improve your margin is to decrease product cost. But this takes cooperation and negotiation with your vendors. This is especially important for items that are marginal in their per-formance and may not make your pickup threshold. If you tell vendors an item isn’t earning its space and may be dropped, you often can get enough cost concession to give the item another chance.

Even when an item is above the threshold, it’s always worth asking vendors for a price reduction, or perhaps a volume rebate, to increase overall margin.

Similarly, if vendors offer you a cost reduction, don’t just automatically reduce the retail price to reflect the change. If the item still performs well and it’s early in its catalog lifecycle, maintaining the retail price and enjoying the increased margin may be the right thing to do. You always can lower the retail price later if the product starts to trend down.

2. Raise prices. This usually is hard for merchants and certainly should be managed judiciously. However, there are many opportunities to boost your margin by increasing the retail price of existing items. This is especially true if the price isn’t at a psychological threshold such as $19.99 or $29.99.

For example, if the price of an item currently is $27.99 and the item is performing very well, chances are you won’t decrease response much by adding $2, and you’ll realize a 7 percent increase in revenue for every item sold.

Additionally, be sure your price endings are maximized for your brand strategy. In other words, if yours is an upscale brand and you’ve ended your prices at 50 cents, you might want to try 75 cents. Or if you have a value-price strategy and are at 95 cents for price endings, go up to 99 cents.

What appears to be a small change when multiplied by hundreds or thousands of units actually adds up to a substantial amount of overall margin dollars.

3. Don’t set prices based on cost-plus strategies. Setting the retail price based upon the cost and a static margin percentage is a sure way to walk away from potential margin dollars. This applies to setting the price too high or too low.

I’ve encountered many buyers who are embarrassed to get a 70-percent or higher margin. But if the value and price point are consistent, then the high margin percentage is simply a reflection of great negotiating or a great find. This also leaves sufficient room to mark down the item for liquidation or to give it a boost as it ends its lifecycle.

Conversely, there are times when a lower margin percentage will increase item demand to a point where more margin dollars will be delivered on the space than if a higher margin percentage were used. This is especially true on trendy or competitive items that can be found from multiple merchants.

Remember, setting retail prices is both an art and a science, and as such, should be carefully considered. Treat items differently based on factors such as price point range, size of catalog presentation, return rate and shipping costs.

4. Manage inbound freight costs. Inbound freight becomes a part of your overall COGS and, therefore, it affects your margin dollars. Reducing freight expense can be fairly simple if this hasn’t been an area of attention for your company.

First, don’t allow vendors to prepay and add freight. Pay for in-bound freight separately, and negotiate freight rates with specific carriers or with a freight-management company such as Donnelley Logistics, DM Transportation Management or C.H. Robinson.

Ensure that you’ve enclosed shipping instructions for vendors, and charge them back if they don’t abide by your rules. If you allow vendors to pay freight and add it to the invoice, this can become a profit center for them due to significant markup and administrative fees.

Following a few of these examples should help you to improve your overall margin dollars and percentages as well as put you in good graces with your company’s CFO. Remember, if your sales are $10 million and you improve overall margin percentage by only 1 percent, you add $100,000 to the bottom line.

Now you can ask for the raise you’ve been wanting!

Phil Minix is the vice president of catalog marketing for Reiman Publications. You can reach him by e-mail at pminix@reimanpub.com.