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Retail Profit Margins: How To Calculate And Improve Them

Posted by: Amogh Balaji
Accurately calculate retail profit margins with a POS system.

Generating high retail profit margins is the goal of every retail store. So is sustaining those margins consistently. Accurately calculating them reveals how efficiently your business is operating. Subpar profit margins are critical indicators that a store requires optimization and improvement.

Running a store without evaluating its performance at regular intervals can lead to problems in the long run. Of many areas to analyze, retail profit margins show retailers if the store is heading towards success or disaster. Regardless of how old your store is, be it well-established or new, knowing your profit margins is pivotal.

In this article, we help you estimate the success of your business and to improve on it. Let’s briefly discuss how to calculate profit margins and enhance them. The best way to keep track of such metrics is to use a POS system. With the software, you won’t need to do the calculations manually. If you don’t have one, we explain how to measure profit margins. Let’s get started.

Essential profit margins to calculate

Retail profit margins is an umbrella term. There are two types – Gross and net profit margins. They are distinct from each other. Calculating both of them reveals how financially healthy your business is.

Gross profit margin

Gross profit margin reveals the efficiency of your retail management strategies and operations. If your business is a new venture, fluctuating profit margins are nothing to be alarmed about. That said, aiming to raise margins and maintaining them is critical.

The revenue your store generates minus the cost of goods sold by the total revenue times a hundred. That gives you your gross profit margin percentage.

Let’s say your total revenue is $30,000 and the goods you sold amount to $20,000. Going by the equation, your gross profit margin is 33.3%

Net profit margin

Net profit margin divulges the amount of profit your store generates from the revenue. It factors in expenses pertaining to operations, repair, and tax.

The revenue you generate minus all the costs incurred by the total revenue times hundred. That is your net profit.

Let’s say your total revenue is $30,000 and all the costs your store incurred (tax, employee salary, repair costs) amount to $25,000. Then, according to the formula, your net profit is 16.6%

Improving your store’s profit margins

Now that you know how to calculate profit margins, you may notice that you need to improve them. Here are five pointers that help raise your profit levels.

Raise prices

A simple strategy to boost your profit margins is to increase the price of the products you sell. Although it is easier said than done, offering your customers value addons helps transition your product prices. Avoid hiking up costs significantly. Taking a gander at competitor prices enables you to figure out the right selling price.

Eliminate redundant inventory

Redundant inventory items hinder profit margins from going up. These items refer to products that sit on store shelves for prolonged periods of time. They don’t sell quickly and occupy storage space. Identifying these products and halting purchasing them will improve profit margins.

Lower expenses

In addition to raising product prices, lowering your operational expenses can significantly boost profit margins. Assess how your store operates and the overhead costs. Look for activities that you can automate, improve speeds, and associated expenses you can cut back on. A POS billing software application is the best, most cost-effective solution for automation and complete retail management.

Get products that customers want

Next, learn what products are in demand with customers. Adequately stocking up on those will result in smooth, high volume sales. And with faster sales, your profit margins will go up. An additional tip is to arrange trending products in areas that are easily accessible to customers.

View reports and analytics and optimize

The business data your store collects over some time unveils meaningful retail performance insights. It shows you what is working and what needs improvements in the store. Using those insights to optimize your operations increases profit margins.

Summing up

Manually calculating retail profit margins and finding optimization opportunities in the store is a cumbersome task. On top of being time-consuming, there is a lot of room for errors to occur as well.

A world-class Point of Sale software application like SmartPOS eliminates those problems. And instead, it improves the overall health and retail profit margins of retail stores. Learn more about SmartPOS – the feature-packed, easy-to-use, cloud-based POS system by reaching out to us today.

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