Part of Creating the Difference is about education. We want to support pro shops and consumers alike. Today we want to educate on the business side a little bit. As a company, profitability is the main way we measure success. Growing CtD, we have used many business principles to determine our business plan. When we expanded into the pro shops, we had to help our team understand some of those principles to keep the stores profitable. We want to share some of those principles with you in the hopes you may be able benefit as well. Today we are going to address profit margin. In later blogs, we will discuss some other principles and tips for being more profitable.
Many pro shops look at the price they pay for an item and know they have to sell it for double what they paid for it. When you double your money on an item, it is called a keystone markup. We all understand that but profit margin is where we can truly measure our success. Profit margin is the percent of profit made on an item. So if an item has a keystone markup, it has 50% profit margin. The image below shows how to figure profit margin.
Here is an example:
An item purchased for $30 and sold for $54 has a profit margin of 44.4%. Let's do the math:
54 (Retail Price) - 30 (Cost) = 24 (Profit)
24 (Profit) / 54 (Retail Price) = .444
.444 x 100 = 44.4%
For many items stocked in a pro shop, getting a profit margin that high is unrealistic. If we were to keystone a bowling ball, we would go out of business because the price would be so high.
On a high end bowling ball, the cost (without shipping) is about $135. To keystone an undrilled bowling ball, you would double the cost (135 x 2 = 270). However, the price of bowling balls is really controlled by the internet. An HP ball retails around $175. So let's run the formula at a cost of $135 and a sales price of $175.
175 - 135 = 40
40 / 175 = .228
.228 x 100 = 22.8%
Ideally, we want an average profit margin of 30%. This helps to cover the cost of having a store front (rent, power, internet, payroll, etc). On bowling balls, we're only able to make 20-25% profit. And that's only if you're not paying shipping. Let's run that same scenario with a $20 shipping fee:
175 - 155 (135 cost plus 20 shipping fee) = 20
20 / 175 = .114
.114 x 100 = 11.4%
This is why it's important to make your profit margin where you can. Selling accessories like That Purple Stuff and That Wow Factor TR is a good way to get that higher profit margin you need to make money. Stay tuned for some more tips to keep you in the black.