Monday, September 17, 2012

Elevator pitch: Removing average gross margin %'s from retail planning.

Existing retail planning methods using a sales and an average gross margin percentage target constantly lead to suboptimal decision making by buyers and merchandisers.
For example; a company has a gross margin target of 40% and costs are 35% of turnover.
If a certain product sells better than expected and has a margin of 30% this has to be compensated to reach the 40% gross margin target.
The decision might be to raise the price, to promote other products with margins above 40%, or to even stop selling the product.
The underlying assumption when using an average gross margin target is that products sold at a lower margin percentage than the average cost as a percentage of sales are not profitable.
But products with low gross margins can be very profitable if their selling price is higher and/or number of units sold is higher than comparable products. Products with below average gross margin percentages often increase the store's net profit margin.
The costs are mainly the amount of space used and handling time for a certain product, not a fixed percentage of the selling price.
Retail planning should be based on gross margin income in $ (per sq. meter) without an average gross margin % target. This is called contribution margin-based pricing. (Deckungsbeitrag in German).

Es handelt zich niet um Strategie Trading Up oder Down aber die Wahl von "Kosten- und Leistungsrechnung" System. Frueher hat man in Euros pro Teil im Haus (Produktionsfaktor) genutzt fuer Plannung
statt Handlungskostenzuschlag in % . 

E-mail: ajbrenninkmeijer (a)

1 comment:

Ansgar John said...

via Twitter @koppelaar: "See also "What the CEO wants you to know". Also good: when setting targets redefine X in "profit per X" in an out of the box way"