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Chapter 1 of 5

Working out profits and prices

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Retail guides > Retailer's guide to making money > Working out profits and prices

Working out profits and prices

Learn about the tenuous relationship between what a retailer charges, and what they get to keep. We explore ways to calculate, monitor, and boost profits.

Finding the bottom line

All businesses seem like moneymakers when you’re on the outside looking in. You check the prices they charge, guesstimate wholesale costs, and assume the rest is profit. But it doesn’t work that way.

Let’s break it down properly.

net profit breakdown diagram

In New Zealand, retailers generally only bank 3.7% of each sale as profit.

So while we all broadly understand that income whittles down to gross profit, and then to net profit (which is called the bottom line), most of us underestimate just how significant the whittling is.

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Getting some control over your profits

You can’t control what you can’t see. One of the keys to driving profits higher, is knowing where they stand now. Don’t get into the habit of only checking sales because that tells just part of the story. 

Get regular reports showing things like:

  • sales income

  • cost of goods sold (these costs can move around a lot)

  • wages

  • net profit 

It’s also worth getting a report on debt levels, because it’s important to have on overall sense of whether they’re growing or shrinking.

Learn more in the chapter on staying on top of the numbers.

How to increase profits

There are two fairly obvious approaches to grow the gap between income and costs.

Most of these ideas come with trade-offs. Dig into the pros and cons with a mentor, bookkeeper, or accountant before running with anything.

Search for bookkeepers and accountants in the Xero advisor directory.

Getting prices right

Pricing is a tricky topic. There’s not a lot of room to move when you have a competitor down the road. And no retailer wants to be accused of gouging their customers. 

So how do you set prices that are fair, competitive, and profitable for your business? Here are a couple of common approaches.

Cost-plus pricing

Your first priority is to make sure the business is viable, which means your prices need to cover costs and then some. For that reason, it’s a good idea to identify the COGS (cost of buying inventory and getting it into your customer’s hands) for a given product, and then mark it up.

You might find a standard mark-up rate for shops like yours. Or you can come up with your own mark-up rate based on what will or what won’t make money for the business. Of course you generally have to keep prices competitive, which is where market-based pricing comes into it.

Market-based pricing

Retailers who sell common consumer goods generally have to set prices somewhere near the market average. It’s worth seeing what’s being charged for similar products and then either:

  • go higher if you think you can differentiate yourself in some way. Perhaps you’re local, artisan, more convenient, or have a really nice shop.

  • match it if your customers regard your products as everyday items.

  • go lower if shoppers in your category are price-sensitive and you think you can keep your costs low over the long term.

Chapter 2: The economics of sales promotions

It’s never too late to start budgeting. It can provide a huge boost, even if you’ve already been in business for years. Accountants say it’s an area where many retailers fall down.

Read chapter 2


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