What’s in your margins?
Alternative ideas for increasing margins
Where do you make your money? Many like to think that the key to success lies in how you market your business to the racers in your area. The more you sell, the more profit your business will make. Increasing the sales requires you to take business from the other dealers selling to racers, get more people interested in racing, or find additional locations for your business by increasing your trade area.
Each of these methods of increasing sales have their own challenges.
An alternative is finding a way of putting additional space between the cost of an item and the price you sell an item for. Considering that customers can shop online for most of what any dealer has to offer, raising prices is very challenging. The only person that is going to ignore the price of an item is the individual who has an immediate need for the part and cannot wait for delivery from some vendor they found online.
An alternative to the direct comparison is to change the way you sell items. There are few parts that a person can buy that do not require additional items for them to be installed properly. The part may need bolts, lubricant, fluid, filter, gasket or something else directly related to the part the customer initially asks for.
Creating a package in which the part is sold with the appropriate accessories is a great way of blurring the lines of direct comparison. Especially when the accessory is something has no name brand, such as bolts, means that the customer cannot determine the exact price of the accessories. The more accessories you add to the initial item, the more you can extend margins.
This strategy works great for the business where the staff has continually demonstrated a lack of ability of selling the add-on items. When the add-on items are automatically a part of the sale, the average line count in each transaction is sure to increase.
There is a third way that we can look at increasing margins. This writer’s father taught that, “sometimes you make money by the price you sell something for and sometimes you make money by how you buy the item you sell”.
When you go to the PRI show this December, one of your intentions is to see new items that various vendors are introducing for the next racing season. A secondary reason for going to the PRI show is to look at how you are going to buy the products for your racing customers.
Writing this article brings a memory of one of your customers who approached this writer after a seminar at the PRI show several years ago. His shop specialized in one specific car. There is a part for this car that has remained the same for many years. Every time this shop works on this car, they are going to put four new of this part in the car.
The shop owner was trying to decide how to buy the part; buying a quantity to meet their needs for the next few weeks or buying the part at a substantial discount which would provide enough of the part to last them several years.
We sat and performed the calculations to decide how they should purchase the part. Our decision made sure they were maximizing their profit on each vehicle.
The same type of decision should be made for the products you are offering to your racers. There are many parts that you sell so infrequently that it does not warrant your stocking the item on your shelf.
With any item, if you are paying for merchandise on a “net 30” basis, anytime an item is sitting on your shelf after 30 days, the item has become the same as if you had taken the money you had paid for the item and sat it on the shelf. This is because in the first 30 days, you are working with your vendor’s money. After the invoice is paid, it is your money that you are working with.
There are items that you are going to keep a specific quantity of on your shelf as well as items that would fit into the category as we described with one of your customers.
When you look at the cost of the part, there is more to consider than just the cost of the item. Who is paying the freight for the item to be delivered to your shelf? The cost of freight can be several percentage points of the cost of the item. The idea of the vendor paying the cost as compared to your shop paying the cost can drive these several points to the bottom line of your profit and loss statement.
Another consideration is the quantity you have to order to get a price break as well as the amount of time you get to pay for the invoice. While you would like to have all of the item sold before you pay for the invoice, you also have to take into consideration the cost of money.
Even if you are not borrowing money from a bank, you do have to consider how much your money could be earning if it were sitting in a bank, or other investment, as compared to sitting on your shelf in the form of a product.
Taking the cost of money into consideration, it can be that there is enough of a cost savings by purchasing the item in bulk to offset having some of that item sitting on your shelf when the invoice is due.
Factoring all of these considerations of buying the product in larger quantities or on the as needed basis can be easily tabulated by utilizing the “cost of inventory” calculator on the profitsplus.org website.
Yes, sometimes you make your profit by selling more of an item; sometimes it is being able to get a better price; and sometimes, it is by how you are buying the products you sell.
What’s in your margins? The more you study and experiment, the more you can improve your margins.