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Margin vs Stock Optimization

Theoretically margin has to end at about 99.9%. At this point suppliers would be charging you $10 for an item that sells at $10,000. Your gross profit would be $9,990 and your markup would be 99,900%.

Years ago a margin of 50% (or a markup of 100%) was pretty good on a lot of typical general merchandise items. Maybe a little more on some low priced items like haberdashery and maybe quite a lot less on certain other categories.

But in say, ladies clothing a 50% margin or 100% markup was OK’ish.

Since then the ballgame has changed. Fashion retailers are pushing for margins upwards of 80% (some by squeezing suppliers but the rest by squeezing the customer). With rents and wages at say 30% of sales, they need this cushion especially when there is a really bad season and markdowns on some goods are running at say 40%.

But where will it end?

There is of course a tradeoff between volume and margin. It goes something like this starting with a margin of say 80%.

If you increase your margin from 80% to 85%, your sales can dip by 5.9% and you will make the same GP$ that you would have made at 80% margin. So any reduction in sales of less than 5.9% is a bonus.

If you increase your margin from 80% to 88%, your sales can dip by 9.1% and so on.

Ultimately, if you increase your margin from 80% to 99.9%, your sales can dip by 20% which is basically where it ends.

And of course it works the other way too. If you reduce your margin from 85% to 80% your sales need to increase by 6.3% if you are to make the same margin in dollars.

So where will it all end. Certainly not at 99.9%! Are we maxing out at about 80%?
Ultimately the market will decide. Economics 101 teaches us that market efficiency is reached when supply = demand.

Has the market already decided that enough is enough? Are retail sales (demand) suffering partly/largely due to this?

If so, what can we do about it?

One solution is to make our stock work harder for us so that there is not the pressure on us to keep stretching margin higher and higher.

And one way to make our stock work harder for us is to have an efficient system to replenish quick moving inventory. This means using a business intelligence tool to optimise the right stock being in the right place as soon as margin falls below an optimum level.

If you believe that your margin is just about maxing out, perhaps it is time to look at such a tool to improve your stock efficiency.

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