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How Do I Improve Retail Profit Margins?

By Carrieanne Larmore
Updated May 17, 2024
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Improving retail profit margins can be accomplished by implementing strategies to reduce costs, reposition products or find supplemental sources of revenue. The retail profit margin is calculated by taking a business’s net income and dividing it by its total revenue. The net income is its profit minus expenses, so reducing its expenses can help increase profit margins. A business can also consider increasing its prices or searching for new streams of income to boost revenue without adding to its costs. Some methods to improve a business’s retail margins include reducing costs, branding and licensing.

To reduce costs to improve retail profit margins, a business should start by conducting a financial analysis. The business should review and analyze its income and balance sheet and cash flow statements by using common ratios to find weaknesses. For instance, if the business determines that it has a low inventory turnover with a high volume of inventory in the warehouse, it could alter its purchasing policy so that less inventory is purchased at a time. Streamlining processes also can increase business efficiency, resulting in reduced costs and higher retail profit margins. This includes integrating IT systems, reorganizing employees and reducing steps to completion.

Branding, repositioning or developing products also can help a business increase its retail profit margins by changing consumer perceptions. Changing consumer perception can allow businesses to charge more for products or appeal to higher income demographics. Conducting customer surveys and market test studies can help a business determine its weaknesses, such as customers believing products to be of inferior quality. It should then devise a marketing strategy to strengthen its brand image and communicate with consumers about their concerns. If products are found to be inferior to those of its competitors or prone to defects, then it could improve those problem areas, communicate changes to its consumers and then reposition itself within the market.

Finding supplemental sources of revenue to improve retail profit margins can be effective, but may not be available to all types of retailers. This strategy involves such techniques as licensing a business’s name, technology, intellectual property or assets to gain a steady stream of revenue. Some retailers can also gain additional income by investing in financial instruments, leasing equipment to other businesses and selling website advertisement space. If a business decides to invest, then it needs to carefully balance risk with reward so it does not lose money in the end. By adding supplemental sources of revenue, businesses can reduce risks of experiencing diminishing revenue during periods of declining sales or economic downturns.

WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
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