Inventory Genius Method: Increasing Margin
Jul 13, 2023
We're continuing the Inventory Genius Method series with a look at increasing margin in your inventory based business. In my post on How Inventory Works, we talked about how increasing margin is one of three things you can do if you know the numbers on your profit and loss statement are accurately recorded, yet you still find a net loss when you scroll to the bottom.
As you read through these posts, remember that every story you'll read is real, and every business journey is a lesson for you as you make your way forward on the path to profitability.
You can print these posts and highlight sections you find especially important. Or, you may just decide to take notes. Be sure to write down questions as you have them and reach out to me when you are ready for the next step or to share your realization moments with me. I want to celebrate your wins and applaud your efforts as you work to become an inventory genius!
Let's get going with our work on increasing margin:
Anne was knocking it out of the park. We had been working together for several years, and I asked her what the biggest change was since we had had our first call several years prior. “Before I started working with you, I was running about a 45% margin. Since we started together, my margin is up to 60–65%.”
A jump of 15% or more in margin sounds good. But what does that actually mean for your business?
Let’s look at what an increase in margin can do over time.
Let’s say Anne grossed $500,000 in top-line revenue last year. Running at 45% margin, her cost of goods sold on those sales would have been around $275,000. This would have left her with a gross margin of $225,000, meaning in order to profit at all, she would need to keep her overall expenses for the entire year at $225,000 or less.
This year Anne increased her margin to 65%. Even though she brought in the exact same $500,000 in revenue, those sales only cost her $175,000, yielding a gross margin of $325,000. If the cost of running her business ends up being $225,000 again this year, she will now show a $100,000 profit on those exact same sales.
That is why increasing your margin matters! And increasing your sales while increasing your margin can matter even more.
So how do you do it? It is all about buying smart and buying right. Take the emotion out of your inventory purchasing, and focus on the right customer at the right time for the right price. A lot of “rights” I know, but this can be done in part using a tool called an open-to-buy.
An open-to-buy, or OTB, is essentially a buying budget. It is a way to eliminate emotion and focus on the right things when it comes to making a purchase. You want to be an inventory genius? Become best friends with your open-to-buy.
The simple formula for an open-to-buy is:
Your planned sales + your planned ending inventory - your beginning inventory = your open-to-buy.
In everyday language, it is your sales goal + how much inventory you want on hand at any given time - the inventory you are starting with today = OTB.
Even simpler:
Goal + what you need - what you have = what you can buy.
What’s your sales goal? Add that to what you want to keep in stock. Then subtract what you already own. The difference is your budget for more.
If you Google OTB, you will find other metrics, like markdowns, that you can add to the formula. That is fine and dandy and definitely something to think about down the road, but if you are currently purchasing only what you like and what everyone is telling you they will “absolutely buy if you stock it,” then stop that madness, and go with a simple OTB.
Start small, be consistent, and focus on margin from there.
So how can an OTB help you increase your margin?
You won’t simply be guessing, buying, guessing wrong, marking down, and repeating this ugly and unproductive cycle. You will be buying smarter, and buying smarter means more margin.
When you begin to use an OTB, you will start to see that what you buy directly affects what you make. You start to focus on the right things—replacing what sold, not buying just because. Once you start to really use your OTB, buying will become a game of strategy, and you will be the game master.
Should I buy more shirts? Do I need more shirts? If I do, why did the last ones sell so fast? What else can I use my buying dollars for?
Instead of buying for the sake of it and having too much, leading to the need to mark it all down (thus decreasing your margin), you will become more strategic with your decisions and will focus on the right things. As my good friend Susan Bradley, founder of The Social Sales Girls, says, “Where your focus goes, your results follow.”
Once you master the art of the general OTB, you can dial in and create an OTB for any and every category of your business. Suddenly, that overall budget you have will be divided based on every category, and the inventory that sells best will get replaced first. You won’t simply be guessing, buying, guessing wrong, marking down and repeating this ugly and unproductive cycle. You will be buying smarter, and buying smarter means more margin.
Another way to increase margin is to focus on pricing. Remember the client who I asked to mark up everything in her store by an additional dollar? That activity produced margin.
Let’s take a look.
If she had 1,000 items in her store that were $1.00 each, she could sell them all and make $1,000 in sales. If each item cost her $0.50, the cost of those sales would be $500. This would give her a margin of $500.
Let’s say she listened to my advice and marked everything up by $1.00, though the products still cost the same to purchase. She sells everything and would make $2,000. Now she has a margin of $1,500. That means an extra $1,000 for her, simply from increasing her prices by $1.00.
Properly pricing your product matters!
“But I will lose all my customers. No one will pay more. It won’t work.” Let me be sarcastic and ask you this: How is it working out for you so far?
Stay out of your customer’s wallet. Stop looking at what every other business on your block is doing and how they are pricing. Focus on buying smart, understanding who you customer really is, and pricing your product to make a profit. If the idea of marking up your products scares you, start small. Start with marking up your best sellers by a dollar. Choose products you know everyone will want and need regardless of what you price them at.
There is yet another way to increase margin—adjusting what you pay for your products in the first place. Finding the right products, negotiating the lowest cost to yourself, and pricing them for profit is the trifecta of margin growth.
Off price, overstock, liquidations, closeouts, buying in bulk, asking for discounts—these are all ways to make your buying dollars go further.
I recently worked with a client who had found herself in some serious debt. Interestingly, she was still grossing around the same in monthly revenue. Some months were even higher. Sales weren’t declining, but she was finding herself constantly without cash. And where does that usually lead? It leads to debt.
Here is how this may look in your business.
You are out of breath. You feel the anxious pinch. Then you get that feeling of instant relief when that capital loan company tells you they can lend you money with no credit check, up to a certain amount. Best of all, they promise it will deposit straight into your bank account that same day. You finally feel as though you can breathe. This month’s bills will be paid. This time it will be different. You will buy some new inventory, pay for marketing to drive traffic, and never borrow again.
So, you click on the little button, enter some quick information, and agree to that nice capital loan. The cash is deposited, and you can finally stop holding your breath.
That is until the next month rolls around, and you are in the same bind. The cycle continues, and the hole gets deeper.
This is what happened in my client’s business. Having never looked at the root of what was causing the cash crunch in the first place, she continued to make the same mistakes. Even more debtors were pulling money directly from her checking account each morning. She had even less control over her cash and felt even more despair.
We started by looking at her margin, which was too low. We took a look at her expenses, which were too high. Our eyes dropped down to the bottom of the profit and loss statement, and we saw the reason for her debt. At the end of the day, her sales, less her cost of goods sold, didn’t yield enough to even cover her monthly costs, let alone the debt she had already accrued. So, while the loans offered temporary relief, she would continue to be in the same boat, only with more holes, without fixing her margin.
What was her plan of action? Focus on the right things first. Focus on margin. We started by looking at her current vendors and suppliers. Which vendor produced the best margin and the quickest sales? Once we identified the vendor, we created an open-to-buy for only that vendor’s products, essentially making this vendor its own category.
Then we began to formulate a plan to buy into that extremely high margin product every single week. This meant that each week we would only need a little bit of seed money to plant a margin producing tree, if you will. It looked like this example:
As you can see from the graph, spending $150 creates $450. Then, taking half of that, $225 creates $675, and so on.
You can do this with a current vendor or with off-price, closeout, or liquidation products. Buy low and sell high. Do this over and over, and do this often. Track the money spent and the money made, and reinvest a small amount each week to put profit back into your business. It is not a quick fix, and it requires you to remain intentional with every dollar spent on inventory, but focusing on your margin is focusing on the right thing. You are on your way to becoming an inventory genius.
If you're looking for next steps beyond these blog posts, I invite you to get started with the Quickstart to Inventory Genius.
The Quickstart to Inventory Genius is my keystone coaching roadmap. Three modules will quickly layout five things to focus on in your inventory based business. You can implement these five strategies right away in order to drive immediate profit. And with the Quickstart, I GUARANTEE that you'll double your investment through either making, saving, or finding that amount in PROFIT. The Quickstart really is the perfect way to get your inventory based business on the right track.
You may also consider joining the waitlist for my top tier mastermind program. The Profit Accelerator Mastermind is a profit strategy program that delivers amazing results for all types of inventory based business owners. It's a chance to work one on one with me and to dive into cash flow, debt management, and the profitability of your business. Interested in learning more? Join the waitlist here.
Looking for related posts?
→ Simplify Business with the Inventory Genius Method
