As the holiday selling season cranks up, we think its important to review some common business concepts that, when ignored, can often land retailers in the red post holidays. In our experience this happens more frequently to online-only or drop shipping dealers. In a race to get customers some e-tailers focus too closely on mark-up at the expense of their own profit.
Mark-up is the measure of how much the cost of an item is increased to arrive at a sales price. Markups are typically discussed in terms of percentages, using the cost and final retail price of an item as reference points. For example, an item that costs a business $20 to purchase, which the business retails for $30, has a 50 percent markup. The same item, if sold for $40, would have a 100 percent markup.
The gross profit of an item is the portion of the final selling price that remains for the business to use after the product has been purchased. The gross profit does not take into consideration costs of doing business. Rather, it is a measure of how much money is generated by the sale of an item for the business to use toward all of its operating expenses.
Sometimes businesses zero in on how much or how little their mark-up can be in order to beat the next guy on price. Be aware that when you sell based on price instead of margin, you are at risk of “starving” your business. You will inherently face several problems. The first is recognizing what brought customers to you in the first place. They bought from you because you had the lowest price for the product they wanted. If they were first time customers, they didn’t come to you because of the relationship you had built with them, your customer service, product knowledge, technical support, or brand recognition. They bought from you because your price was simply a few dollars lower than your nearest competitor.
So you may have gotten the sale this time, but next time that customer wants to buy a product, they may again start their search for the lowest price. In the meantime, your competitor has undercut you by a few dollars, and since you were simply selling on price, as soon as a competitor surfaces that sells the product for less, you’ve lost your customer. The take away here is that lowering your price, while having the advantage of possibly increasing sales, does not necessarily translate to more profits (and in many cases, results in lower profits). KJB wants you and your business to be successful. Since we encourage MAP pricing that results in healthy margins for our dealers and overall steady gross profits, you can put more money in your pocket. At the end of the day that's the goal of every business.
The gross profit of an item is the portion of the final selling price that remains for the business to use after the product has been purchased. The gross profit does not take into consideration costs of doing business. Rather, it is a measure of how much money is generated by the sale of an item for the business to use toward all of its operating expenses.
Sometimes businesses zero in on how much or how little their mark-up can be in order to beat the next guy on price. Be aware that when you sell based on price instead of margin, you are at risk of “starving” your business. You will inherently face several problems. The first is recognizing what brought customers to you in the first place. They bought from you because you had the lowest price for the product they wanted. If they were first time customers, they didn’t come to you because of the relationship you had built with them, your customer service, product knowledge, technical support, or brand recognition. They bought from you because your price was simply a few dollars lower than your nearest competitor.
So you may have gotten the sale this time, but next time that customer wants to buy a product, they may again start their search for the lowest price. In the meantime, your competitor has undercut you by a few dollars, and since you were simply selling on price, as soon as a competitor surfaces that sells the product for less, you’ve lost your customer. The take away here is that lowering your price, while having the advantage of possibly increasing sales, does not necessarily translate to more profits (and in many cases, results in lower profits). KJB wants you and your business to be successful. Since we encourage MAP pricing that results in healthy margins for our dealers and overall steady gross profits, you can put more money in your pocket. At the end of the day that's the goal of every business.
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