Why Strong Profit Margins Matter More Than Sales in Your Product Business

Let’s be honest. Selling more doesn’t always mean you’re making more. In this episode of the Resilient Retail Game Plan podcast I share why strong profit margins are the foundation of a sustainable product business.

I’ll walk you through how to calculate your real margins how to spot the most common mistakes including ones I’ve seen big retailers make and what you can do to improve your pricing without sacrificing sales.

In this episode I cover:

• The difference between 'in' margin and 'out' margin
• How discounting impacts your bottom line
• How often I recommend reviewing your prices
• Why your top sellers might be hurting your profits
• My practical tips for protecting margin and growing sustainably

If you’ve ever looked at your sales numbers and thought "it still feels like I’m not earning enough" this is the episode for you.

Tell me what hit home:

DM @resilientretailclub on Instagram and tell me what resonated most with you.

Please rate, follow, and share the Resilient Retail Club podcast in your app. It all helps us grow the show!

Useful links:

My freebie: http://www.resilientretailclub.com/freebie

My website: https://www.resilientretailclub.com/podcast

My Forbes page: https://www.forbes.com/sites/catherineerdly/

Timestamped summary:

00:00 Understanding Profit Margins

03:46 Why Profit Margins Are Key to Business Success

09:25 Calculate Costs for Profit Clarity

12:06 Minimise Discounts, Maximise Margins

15:31 Ideal Profit Margin Guidelines

17:47 Optimise Profits: Check Best Sellers

21:18 Monthly Margin Management Insights

Mentioned in this episode:

Stock doctor

Faire 50% offer

Use the code GamePlan25 to get 50% off and free shipping with your first order at faire.com

Faire 50% off - use code 'GamePlan25'

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. 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. 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. 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. 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. 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.

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.

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. 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. 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. 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. 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.

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. 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. 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. 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. 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.

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. 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. 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. 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.

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. 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. 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.