Five Minute Friday: Know Your Numbers - The Most Overlooked Metric in Retail

Being a retailer ain't easy. That's why we at the Boutique Hub are going to be coming to you with a new series called Know youw Numbers. We're going to get the facts on what is the most important to drive profit, drive cash in your business, and really have you feel in control over your future. Numbers are black and white. It's the one thing we record every day. And we're going to teach you how to make the most of tracking your KPIs and metrics. Let's jump in on this episode. We're going to cover your initial markup now. Your initial markup, your imu, it is more important now than ever. And holding that initial markup strong is going to be super important to your success. So let's jump in and let's take a look at your initial markup. Okay? Your initial markup is essentially how you price your goods. So let's think about it like this. You go out and you buy an item from your wholesale vendor for $10. That's the cost. $10, right. You price it at $25. You put it in your store, sell it to your customer for $25. The most amount of profit you are able to make is going to be $15. And as we all know, in retail, the price will only potentially come down. Discounts, promotions, markdowns. So that $15 of profit is the most amount. It's your profit ceiling. So where you price something is going to directly impact your gross margin, right? Your gross margin is what you're left with after all the discounts, the promotions, the markdowns. So we want to keep close attention. And it's often forgotten that the pricing is really setting the bar for how much profit you, you can make in your business. So when we talk about imu, think about it as your profit ceiling. Now, the formula is pretty simple. You're going to take your inventory at retail, your on hand inventory at retail, subtract out your cost of goods, right? The inventory level at a cost value, and then divide that by your inventory at retail. Okay? So let's say I have $130,000 worth of merchandise currently in inventory, right? And that's at the retail price. The price. I'm putting it out there. To my customer, my cost of goods was $60,000. So the valuation at a cost level is 60,000. According to this, your initial markup for your store right now is sitting at 53.8%. So again, we want to think about that as your profit ceiling. The most amount of profit you will be able to make in Your business is 53.8%. Right? It will all come down from there after those markdowns, those promotions, those discounts. So it is super important that we understand and track our initial markup to understand more or less where we can expect our gross margins to land. And we all know how important your margin is for your business. Now, why is this so important and related to your markdowns, your operating expenses and net profit, that all important net profit. Okay, let's talk about it. So another formula. This one's a little tougher. So we have to think about your initial markup as well. Where do I even start? Right? How do I know how much I need to price my goods up? Well, there is a target. Okay, so here's how we're going to figure out that target initial markup. What's your desired net profit at the end of the year? If you could walk away at the end of a business year, do you want 8% net profit, 5% net profit, 2% net profit? That is going to be critical to how successful you are as a business owner. So we want to take that goal, that net profit goal. You add in your average operating expenses. So what percentage of your operating expenses sits at year to year? And then your expected markdown percentage. Now, we all have markdowns in our business. And if you go back to your business year to year previously, you'll be able to see where your markdown percentage landed. So let's just take 20%. That's a really good average for a markdown percentage. Okay, so let's look at that formula in detail. I want to make, my goal Is to make 8% net profit. My operating expenses are usually around 40% and my markdowns usually end up at the end of the year at a 20% markdown rate. That means that my target IMU is 56.7%. Okay, now let's go back to that first formula we looked at. That came out to 53%. So if my target markup, my target IMU is 56.7% and I am only reaching a 53% IMU. Well, what does that mean? It means that I'm going to have a harder time reaching that net profit, a harder time covering my operating expenses, and I'm going to have to really manage my markdowns and not go over at at all. So it makes your job harder and more difficult as a retailer if you're not achieving that target initial markup. Okay. So that is why pricing and what you price at is so important. So here are some tips, right? I want you to walk away with some real tips from this series. Okay? So the first thing is make sure you are hitting your initial target markup. Okay? How do you calculate that? I know it may be a little confusing. That's why we have experts in the boutique hub community. We're happy to chat this out with you and really help you develop that target. Initial markup number two, price for value. Okay, what does this mean? You go to a vendor. Let's say you're a home and gift store, okay. And you go out and you find a candle. Okay. What we want to think about is not, hey, I bought this candle for $10, so I have to price it two times markup. Right. I'm going to price it at $20, bought it for 10, pricing it at 20. No, we want to say, how much value does this candle have? What is my customer willing to pay? Maybe they're willing to pay $30. Right? That's a three times markup. So you're going to build in more margin and you're going to raise your profit ceiling. So we want value not just based on the cost price. Know which product categories drive your IMU higher? Well, not all product is created equal. So there are some product categories that generally run a higher initial markup. So you have more margin in those product categories. Think socks. That's a great example of a product category with a higher imu. So we may want to move into some of those categories or if they're selling well, continue to invest in them and then finally discuss markup and MSRPs with your vendors. Now, I know a lot of times your vendors are setting the price. I know you may not have control over that ultimate pricing, but you want to understand exactly the initial markup that your vendor is setting and what you're going to get out of them. And, and you want to have conversations with different vendors, different distributors, so that you can really know what your options are when you're looking to drive that imu, to drive pricing and to drive your profit ceiling higher. And then of course, one more bonus tip. Look into private label. You are always going to make the most margin in private label opportunities. So that's another great tip to really looking to areas that you could increase that profit ceiling. Okay, now let's put this all together. You are going to track your imu. I would suggest month to month. Right? That's a good way of seeing how you're averaging out. And again, it all goes back to. We need to be tracking our on hand inventory. You're going to be hearing me say this again and again. It's one of the basic fundamentals of the IMU formula. You'll see it throughout this series. So these are my tips for pricing. That's why IMU is so important. Let's get out there and raise those profit ceilings.

That's it for five Minute Friday you guys. I hope you found some quick actionable steps you can put into play in your business right away. As always, if you're not yet a member of the Boutique Hub, I would love to personally invite you to join us. It's where all of the daily conversations happen. The up to date what is working now in the industry conversations, the latest trainings, trend reports, discounts, resources and of course access to thousands of wholesale brands that you also know and love. So so please take a minute, follow the link in the show notes and we would love to invite you to join us inside of the Boutique Hub.