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One question I am repeatedly asked by shoe retailers is how to increase maintained margin. The most obvious answer that comes to mind is to avoid overbuying and therefore reduce the margin-eroding markdowns that accompany such a practice. Another way of increasing maintained markup is to find ways to increase initial markup.
Let’s make sure we are all speaking the same language. When I say “initial markup” I am referring to the markup percentage placed on the goods when they are received from the manufacturer. “Maintained markup” is what is left after taking into account the cost of the markdowns. Stated a little differently “maintained markup” is the difference between net sales and the gross cost of the merchandise sold. Gross margin is the difference between net sales and the net cost of the merchandise sold. Total merchandise costs include the cost of the goods freight inward any workroom costs and any adjustments for earned discounts. It is clearly a different number than maintained markup.
Initial Markups on the Rise
According to NSRA’s 2006-07 Business Performance Report initial markups for independent shoe retailers reached an all-time high in 2005 coming in at 56.8%. This represents a 4.8 percent increase since 2001. My hunch is that the almost 5-point gain in five years is due to stores seeking out and taking advantage of off-price opportunities to combat the effects of discounters and increased operating expenses. Whatever the reason we can all agree that initial markups are on the rise… and it’s a good bet that they aren’t going to go down anytime soon.
Having the correct initial markup is the cornerstone to achieving the desired maintained markup. But have you ever wondered what the determining factors for initial markup are? Why do we double the cost? What does the term “keystone markup” mean and where did it originate? I’ll admit that my quest for the origin of “keystone markup” did not yield any definitive answers but it did offer some thought-
Provoking Theories
One source at the National Retail Federation (NRF) seemed to think that there was an actual “markup key” in the early days of cash registers. This practice predated individually ticketed items and pricing was oftentimes handled at the point of sale. One expert thought the term began in the jewelry business. Another believed the phrase more closely follows the dictionary definition of the word which is a stone at the top of an arch that locks the other pieces in place. I suppose this makes sense since 50% of a keystoned item is cost and the remaining half is markup. Regardless of origin keystone pricing refers to a percentage markup applied to a product’s cost although it is becoming an outdated term due to rising markups.
What Initial Markup Must Cover
In my work as a retail consultant I routinely ask retailers to define their initial markup. The answers are quite interesting and run the gamut from doubling the cost and adding my keyword or $2 to a multiplier of 2.2 or 2.3 as an example. These answers over time have led me to the conclusion that most retailers truly can’t explain what initial markup (IMU) is.
Initial Markup: Your Formula Must Meet Your Goal
Ritchie Sayner
Published in the March-April 2007 issue of Shoe Retailing Today copyright ©2007 National Shoe Retailers Association Tucson AZ www.nsra.org. All rights reserved.
On January 31 I spent the day with seasoned footwear professionals in an all-day WISER Selling seminar. I thought I was pretty impressive with my 25 years of retail selling experience but the crowd included people with even more than that. So the challenge was on—could people with this much shoe selling experience actually become WISER? Well I probably would not be writing this article if the answer were no so of
Course: The Answer is Yes!
It’s amazing the amount of talent we have in the NSRA membership. With this talent and experience comes some well-deserved respect for selling. However the best of the best all have one thing in common: They know that on any given day they can be outsold—and they get up every morning looking for ways to keep that from happening. In other words they never stop learning—ever.
But maybe you are one of those veteran people who is looking at WISER Selling and saying “Yeah it looks great but I am pretty good myself. Why would I want to waste my time with this program? I mean I’ve been through them all!”
Why indeed?
A few years ago I did a project for Golf Galaxy. At the time they were an independent start-up. Today they are the largest golf retail chain in the U.S. As part of the project one of their in-store PGA professionals worked with me on my swing and measured me for custom clubs. He asked how many wedges I normally used. I have always carried one wedge in my bag a pitching wedge. Depending on how far I am from the green I would adjust how hard I swung the club to get the ball there.
The PGA pro explained that there are several wedges with different “lofts” based on distance. His point: The purpose of the club is to do the work for you. You should have the same swing every time and let the club do the rest. I was fascinated. A whole lifetime of struggling with this game only to learn that it was the clubs and not me! (Okay that was not exactly what he was saying but I got a lot of mileage out of that thought.)
WISER Selling is much the same way.
If you have been selling for many years you have a bag full of clubs that serve you very well. But if you could add one club to your bag that could save the day in a particular situation and make the difference in selling three pairs instead of just one—who wouldn’t want that?
I have heard countless veterans share their stories recalling the part of the WISER…
Selling DVD
We cover that skill. As the author of this program I spent many days on the road interviewing some of the best and brightest independent shoe sales associates. I interviewed customers to get their points of view as well. One thing was evident: Customers want an experience in the store that is professional memorable and worthwhile. And sales professionals want the same thing!
We incorporated the best tips from nsra.org continued from page 32 was intended to cover.
There are three areas that IMU must satisfy:
- desired net profit
- operating expenses
- markdowns
Outlined below is a formula for determining initial markup given the objectives above.
IMU = desired net profit% + operating expense% + markdown%
100 + the markdown%
Example: Let’s say that our net profit goal is 7% operating expenses are 40% and markdowns are 18% of sales. Our formula would look like this:
IMU = 7% + 40% + 18%
100 + 18%
Using the formula the IMU% would have to be 55% to cover the markdowns pay the overhead and still contribute 7% to the bottom line. If the store average is say 52% on average net profit would decrease to 3.4% right from the start according to the example above. If you do the math that is nearly a 50% reduction in profit. To restate the message initial markup is directly related to net profit. You must start with enough markup in the beginning in order to have something left at the end.
Review Pricing Practices Regularly
It is a good practice for all stores to review pricing practices on a regular basis. Competitive pressures changes in operating expenses and availability of promotional goods all come into play when deciding on a markup goal. Are you making markup decisions based on what a product will sell for or on what you paid for it? One way to avoid falling into the trap of cost-based pricing can take place when buyers are at market. The best time to determine what the actual selling price will be is at the time the order is written. In my earlier retail career I would often have…
Our buyers decide what they thought they could sell a certain item for prior to knowing the cost.
Once we knew the cost we would make a decision to buy or bypass the item. Basing the retail price around the intrinsic value of the merchandise instead of on its cost helped us to increase our initial markup. It’s a strategy that could work for your store as well.
Ritchie Sayner is vice president of business development at RMSA. He can be reached at rsayner@rmsa.com.
Continued from page 31
Article Summary
The article discusses strategies for shoe retailers to increase their maintained margin by avoiding overbuying and enhancing initial markup. Initial markup which has been rising is crucial for achieving desired maintained markup and must cover net profit operating expenses and markdowns. The importance of regularly reviewing pricing practices and basing retail prices on the intrinsic value rather than cost is emphasized.
“Initial markups are on the rise… and it’s a good bet that they aren’t going to go down anytime soon.”
Real-World Examples of Increasing Maintained Margin
In the retail industry effectively managing initial and maintained markups is crucial for profitability. Here are some real-world examples of strategies retailers use to enhance their maintained margin:
- A clothing retailer reduces overbuying by using data analytics to forecast demand more accurately thereby minimizing the need for markdowns and preserving their maintained margin.
- A bookstore increases its initial markup by sourcing books directly from independent publishers at a lower cost allowing for a higher markup percentage when the books are placed on the shelves.
- An electronics store regularly reviews its pricing strategy adjusting initial markups based on competitive analysis and changing operating expenses to ensure a healthy maintained margin.
