Expert Insights
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CALCULATING GROSS MARGIN FOR YOUR STORE
What you need to know about gross margin & your store
 

"Question – How do I calculate my gross margin for my store and how do I optimize the margin? This has really been a huge challenge for me as I am not very good with Finance and I’m not very sure on how to increase my profit sales."

Expert Insight - The calculation of sales minus cost of goods sold (COGS) is an integral performance indicator for your store. It measures the profit generated from each product you sell on the Konga Mall. It is something that many merchants overlook when they focus exclusively on revenue growth or volume of products they churn out and turn into sales daily.

There are many factors that would influence your gross margin. We’d examine some ways you can optimize your gross margin to enable it meet your business objectives.

Many online stores operate with a gross margin between 10 to 40 percent. That range may be lower or greater depending on how you price individual products, what your overall product options are, what your sales variance are, and several other factors.

You can generate the same amount of overall profits with a 20 percent gross margin that you can with 80 percent by selling a much higher volume. Many sellers may be pleased with a 20 percent gross margin. Most have a very high sales volume and a very lean operation that is highly efficient.

Conversely, large e commerce stores with a higher margin are likely industrial manufacturers or distributors with lower volumes that target the high end of a specific market. They will have more margin from product sales to cover other expenses, but the size of their market may be much smaller or limited by their pricing strategies.

It’s important to set a target for your gross margin and manage it carefully. That process will allow you to more accurately budget to support your organization, infrastructure, and operations.

Let’s examine this in more detail. The key variables that you control are:

  • Products
  • Pricing
  • Sourcing
  • Merchandising and Promotional Offers.

PRODUCTS: Key strategies for selecting products to sell are (a) determining what your buyers want to buy, and (b) selling a mix of products that have a chance of achieving your target margin.

  • Start with the products your target customer wants to purchase. Low-to-mid range products will have a much higher sale potential, but will likely have more competition, which could produce lower margins. Higher-end products, meanwhile, will cost more and your markup may be less than expected.

This brings us to your overall product assortment. This is extremely important. As evidenced by the larger retailers, carry a wide assortment of similar products. This will attract different shoppers. Offering a low-priced alternative makes the mid-range item look upscale. Having a much higher-end offering makes the mid-range product look like a great value.

Another strategy is private-labeling your own brand. Invest in branding, and package them as your product. We have several sellers on the Konga Mall that already have their branded products. This will provide an exclusive sales opportunity and offer a way to increase your margin since you will direct competition..

PRICING: Your pricing strategies should support your product decisions. Consumers increasingly price shop — from inside a physical store, on a mobile device, or on their desktop computers. You don’t necessarily need to match prices since there are other ways to add value. You may need to adjust pricing to make your target products more attractive. You may want to price a lower-end product slightly higher than the norm so it is closer to the price of the items you really want your shoppers to buy. That will make them more likely to see it as a good value and spend a bit more to get it. Or, if your margins are high on your luxury items, you may want to discount them to attract more luxury buyers. You may also need to adjust pricing to make your target products more attractive. You may want to price a lower-end product slightly higher than the norm so it is closer to the price of the items you really want your customer to buy.

SOURCING: This is another variable that merchants underutilize. You want the lowest possible cost of goods. Shop relentlessly for lower cost suppliers. That means having many suppliers to choose from and being able to purchase at the lowest price. Buy in volume and negotiate a higher discount if possible. Go straight to manufacturers, avoiding the middleman if you can afford this.

MERCHANDISING AND PROMOTIONS: The variables here are (a) how you present your individual products, and (b) how you present the overall assortment of products in that category. Make sure, for example, to emphasize the features that differentiate your products beyond price. This means your description should be well detailed letting buyers know why they should choose your product over any other seller even if the price is higher. Be conscious of reviews and ratings in your store so your prospective buyers don’t sneak off to other competitive sellers on the Konga Mall to do more research and never come back to your store.

Merchandising also includes promotions, and personalization. You can influence the way buyers shop at your store through your merchandising tactics like offering discounts, BOGOF (Buy one get one free). This is growing in importance, as many of our mall’s sellers now use personalization to present products that a prospective customer is more likely to buy. Never show a prospective high-end customer your low-end items, for example. You could start with your mid-range products and up-sell to your high-margin products instead.

Culled from Practical Commerce post on Managing Gross Margin

ABOUT THE EXPERT
Respected as a retail and resolution expert, Amaka is the Vice President of the Konga Mall as well as an integral part of the Konga Mall’s historical beginning. An industry expert in conducting practical and theoretical research in retail and finance, she seeks to address all our sellers’ queries and professional advice regarding their stores as well as financial clarification. For more researched expert advice from Amaka and the rest of our expert team, you can send in your questions regarding your store to mall@konga.com.