If I asked you how much profit margin do you think your shop makes, what would you say? In an article from the American Business Institute, people thought the margin was 36%.
Now if you are a shopowner in any industry you are probably thinking “I wish! If I could make that much money I could maybe . . .”
The reality is that retail shops in all industries make a 1-9% GPM. Gas stations are at the bottom. Jewelry stores are at the top. Specialty stores make between 5 and 8% GPM.
So what is this and why do they make so much less than we thought?
First let’s unpack GPM. Begin with the retail price of the item, let’s say it’s $10. Take from that the cost of the item. That’s the wholesale price, usually half the retail (something also called keystoning). For our item this is $5.
Now if there were no other costs involved in getting the goods to you then the gross profit margin would indeed be high — 50% in fact.
But it isn’t quite as simple as that, because the product at the wholesale price isn’t the only part of the product sold to you. And that’s where the GPM goes down.
First off, what did the store have to pay for shipping? Let’s say 5 items were shipped in a flat rate USPS box, usually the cheapest way to ship. At current prices this adds about $2.25 to the cost.
Next take what it takes to get the goods out the store — tissue paper, bags, stickers, cash register tape, paper for receipts.
Now add in office supplies, displays, transaction fees from credit card companies. Every store has these.
And then put into it membership fees for trade and business organizations. The cost to create displays — I’m sure you can think of plenty of others.
Notice this did not include several elephants: employees, rent, or utilities. That’s because all of these things are stuff the business is supposed to pay for out of those profits.
You might think you can get around this by going virtual and being on the Internet. And while there is a physical store there are costs here and they might be close to a rent payment, even if you do the work yourself. Sell on eBay and your cost to sell can run to around 15%. Use an ecommerce solution to open a store and it could be several hundred dollars a year. Add in Internet access, your phone line, hosting, email, and domain fees. Ar you starting to see a pattern?
Now a clever person might think the solution is not to have employees, and many shops in many industries do just that. But stop and think about it. What happens when the shopowner goes to market, or is sick? How much revenue is lost if the store is closed. How much money do they need to spend to get people to keep the store open?
How often when you’ve watched Restaurant Impossible or Bar Rescue have you heard the owners say they don’t get paid? Have you thought why? It’s because there is not enough GPM after what has to be paid to others to pay themselves.
Running a retail business isn’t easy, it’s hard. And even the most business-minded of them struggle to balance this and still make adequate money to keep the doors open and to give you great product.
Next time you visit a shop thank the shopowner and buy an extra canvas or two.
About Janet M Perry
Janet Perry is the Internet's leading authority on needlepoint. She designs, teaches and writes, getting raves from her fans for her innovative techniques, extensive knowledge and generous teaching style. A leading writer of stitch guides, she blogs here and lives on an island in the northeast corner of the SF Bay with her family
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