Margins- Percentages and Dollars; Where to Focus?

/0 Comments/in , /by

I always looked first at gross margin percentages when I was running a business. Before revenue, before anything. Because those percentages were what determined how many dollars I had to pay all the salaries and operating expenses. Higher had to be better. It just had to be.

 
Except that I was never dealing with major price differences in nearly identical products when I did my analysis. And I think maybe that changes the calculation for skate hard goods. Let’s see.
 
One Shop’s Numbers
 
I called a shop. It’s not just a skate shop- it does snow too. I talked to one of the guys who runs it and he gave me some rough numbers off the top of his head (You know who you are- thanks!).
 
They sell two to three hundred branded decks a year. They charge $50 to $55 for each one (more than some shops I think) with grip tape. Those decks each cost them a bit north of $30 each, he estimated. Let’s say $32.00.
 
They also sell around 500 blanks a year. Those sell for $30.00 each with grip tape, and cost them around $16.00.
 
If they sell branded decks for $53.00 each, and sell 250 of them, then their annual revenue from those decks, according to my antique but trusty Hewlett Packard HP22 financial calculator is $13,250. Their gross margin percentage is 40. Their total margin dollars earned on each branded deck is $21. The total margin dollars earned after they sell all 250 is $5,250.00. The total cost is $8,000.
 
Now let’s take a look at those 500 blank decks in the same way.
 
The first uncomfortable but unavoidable fact, of course, is that the shop is selling twice the number of blank decks as branded.   Two-thirds of this shop’s skate deck buyers think that a branded deck is not worth $23.00 more than a blank. Or they think it’s worth it, but can’t afford it.
 
Companies who are cutting their prices on branded product better hope it’s the later, and they better hope their brands are “cool” and they better hope they can earn at least the same number of margin dollars to afford the programs that keep or make a brand cool.
 
I’ll leave it to all your arbiters of coolness and fashion to figure out which brands are cool. Hell, I buy most of my jeans at Costco. I’m so uncool I’m even willing to admit it.
 
But I digress. That’s too kind a term, actually. I’m wandering around in the wilderness here, and better get back to the 500 blank decks the shop is selling.
 
So anyway, they’re selling these 500 blank decks at $30.00 a pop and getting revenue of $15,000 annually. That’s more than from the branded decks. The gross margin percentage is 47 percent. Total gross margin dollars earned is $7,000. Total cost of these inventory decks is $8,000- the same as for the branded decks.
 
I swear to god that I didn’t figure out these percentages and stuff in advance to make a point. I did it as I wrote it, unclear what I was going to come up with and what it would suggest. Much as I hate struggling to create a table, I think this is worth while one. I’ll leave it to the poor layout people at TransWorld to make it legible.
 
 
 
Branded
Blanks
Number Sold
250
500
Selling Price
$53
$30
Cost
$32
$16
Total Revenue
$13,250
$15,000
Total Cost
$8,000
$8,000
Gross Margin Percentage
40%
47%
Total Margin Dollars
$5,250
$7,000
  
 
A Little Analysis
 
There are a couple of caveats to this. First, I didn’t specifically include the grip tape. As both branded and blanks include it, I don’t think it changes the analysis. Second, different stores have different costs, selling prices, and mixes of branded and blank decks. Change those things and you obviously are looking at different results. Which means, as will be clear when I discuss the implications of this below, that every shop should be using this table to take a look at their own numbers. Not just for decks, but for every product where there is a non-branded alternative.
 
At the risk of inflicting a blinding glimpse of the obvious on you, I’m going to point out some things that the table already makes very clear.
 
The total investment for the shop over a year of $8,000 is the same for both branded and blank decks. I’m pretty confident that having to handle twice as many blank as opposed to branded decks doesn’t increase the cost of selling the product. If you invest $8,000 in branded decks, you earn $5,250 in gross margin dollars. Invest the same $8,000 in blanks and you earn $7,000. From a strict financial point of view, which would you rather do? Which is the best use of your $8,000?
 
If it didn’t affect how their customer viewed the shop, if they didn’t recognize that what the brands do is critical to the popularity and growth of skating, if branded product wasn’t important in getting customers into the shop and if those customers didn’t buy stuff besides skate decks, then this shop would rather sell blanks than branded decks. The return on investment is just better. Thirty three percent better.
 
Those are a lot of ifs. Important ifs. In spite of what the raw, maybe oversimplified numbers show, there is no way, not even in a strictly financial sense, that shops can not be committed to carrying branded product. Without it, they just aren’t skate shops.
 
But that doesn’t mean you can ignore this analysis.
 
What’s To Do?
 
For this shop, at least, these are not big revenue numbers. But each shop has to do this analysis and, as I said above, not just for decks. There is no retailer out there who does not want to sell more of whatever makes them more money. At least, I hope there isn’t and if there is, they won’t be around long.
 
Financial considerations never exist in a vacuum. After you do this analysis for your shop you have to ask:
 
  • Does the customer who buys a blank buy as much other stuff as often as the customer who buys the branded deck?
  • Does the customer buying the blank replace their deck more often and, therefore come in the store more often?
 
If the answer to those two questions is clearly “no,” then what the retailer wants to do becomes quite clear. Looking at decks in isolation, you may earn more selling blanks compared to branded decks overall. But you earn more margin dollars selling each branded deck than on each blank ($22 compared to $14 in this case). And the customer who buys the branded deck spends more money on other stuff and comes at least as often as the customer who buys the blank if, in fact, the answer to these questions is no. You certainly don’t get rid of blanks, but under these circumstances you recognize the value, in a broader sense, of the customer who is committed to a brand or brands.
 
What is that value? I don’t know! Figure it out. Ask your sales people. Look at your sales journals and see what went out the door with the branded, as opposed to the blank deck. Surely your point of sale system allows you to track customers by phone number or something. This is an important thing to quantify. It is a strategic issue especially if you are concerned that hard goods prices may move down. 
 
If the answer to those two questions looks like it might be “yes,” then the role of branded product changes. You don’t have to try and carry as many graphics from as many brands as you can plaster the walls with. It’s not that you don’t want to carry and sell branded decks, but some part of that space may be better used to sell other products.
 
The shop referenced in this article sells twice the number of blank as branded decks. So the return on investment calculations, focusing on just the decks in isolation, favors the blanks. In a shop where the numbers were more equal, that would change. The gross margin percentage on the blanks would still be higher, but the total margin dollars earned would favor the branded product.
 
So what we have here is a situation where gross margin dollars may be more important than gross margin percentage.  I thought we might get to this point.  But then again, depending on product volume and customer buying behavior, it might not be.
 
Do the little table above for your shop wherever you have a branded and a blank product. Figure out the typical buying behavior for customers of branded versus blank product. You will make some better decisions that will make your shop more money.

 

 

Action Sports; Are We Still in That Business?

/0 Comments/in , , /by

Seems a silly question I suppose. Action sports are what we do. It’s what we’ve always done. It’s what we love. Our trade shows are more fun than anybody else’s. We get to take vacations and call them business expenses or, even better, product testing. Uh, not that I’ve ever done that, Mr. Tax Man, sir. But I’ve heard about it.

I’m not quite sure that’s the business we’re in any more. Or, to put it more precisely, I’m thinking that action sports is only part of our business. A smaller part for many of us. Maybe I’m just playing with words. “What’s in a name?” somebody once asked. Maybe a lot if that name determines how you think about who your competitors and customers are, how you need to do business, and the market where you position your product. Put like that, it’s a survival issue.
If you’re going to make money in this industry, you need to recognize how it has evolved and run your business accordingly. By reviewing that evolution, and talking about how you might redefine the business you’re in, I’m hoping some things you should be thinking about doing differently will become obvious. Or, at the very least, you can start to move in the direction of identifying those issues and opportunities.
Can It Be This Simple?
I thought this would be a nice easy article to write. Just sort of review some industry evolution. You know- how we use to sell mostly to participants and tended to be focused on a single sport, but now we’re selling across the sports, increasingly to non participants who just want to look good and maybe feel some connection to the lifestyle and account for the majority to most of our sales and even more of our profits. Then pronounce we’re in the fashion industry and be done.
Wouldn’t it have been great? “Wham! Bam! Thank you ma’am!” [good luck translators] and Boardsport Source would send me a check, and I could move onto my next project. But then I realized two things. First, that Boardsport Source pays by the word.  This was looking like a damn short article, and that wouldn’t do.
Second, and arguably more importantly, pronouncing that we are in the fashion business wasn’t much help to anybody. It was kind of like saying the goal of a business was making money. True, you need to do it, but it doesn’t say a thing about how to go about it.
So it appears I’m stuck at my computer a bit longer.
Still, my blazingly short description of our evolution as an industry- from participant to non participant as main customers and towards the fashion business- is generally accurate, though not adequate as I explain below.
Fashion Business- What’s That?
Are you thinking, “We all know what the fashion business is, so there’s no need to discuss it?” Well, you’re smarter than I am because I’ve decided I don’t quite know what it means, at least not in a useful way. Have you ever noticed that when the consensus is that “everybody knows,” you’ve probably got something worth digging into?
Here’s what I think characterizes the fashion business:
  • All product differentiation is created by advertising and promotion (branding) and design.
  • No functional product difference remains exclusive for long.
  • The fashion business is huge. The action sports business is tiny.
  • The fashion industry encourages product replacement. If we all wore our shoes and apparel as long as we reasonably could, the fashion industry would be a hell of a lot smaller than it is.
  • In a product we are encouraged to replace from season to season, function can become less important than form.
  • The customer base is no longer easily identified or segmented. Marketing (the process of figuring out who your customer is and why they buy from you) is critical. And challenging.
  • Your relationship with core participants is different. You want to sell to them, but they may be more important to you for the legitimacy and brand power they can give you with all the non participants who represent your biggest opportunity for growth.
If you think about these points, you may come to some of the same conclusions I came too. The one that sticks out like a day glow, skin tight orange/lime green ski suit on the slopes (Those aren’t fashionable again yet are they?) is that it is absolutely futile to say, “We’re in the fashion business,” because that business is too vast and varied and massive to tell you anything useful.
Which bring us to marketing.
Marketing- No Way to Avoid It.
 
Remember that we all use to be our customers. Market segmentation? If they boarded, they were a potential customer. If they didn’t they weren’t. Marketing done. It was easy, accurate and damn near perfect. It was seductive because it didn’t require any effort and didn’t generate any uncertainty.
Like an archeologist digging down through the layers of a civilization, we can find the remains of those days in some companies, where the people who manage the still critical advertising and promotions function continue to be called The Marketing Department. I have no idea why. If you accept my definition of marketing above, they don’t do any marketing. But somehow the name hangs on.
“What’s in a name?” I asked at the beginning of this article. Maybe a lot if you think you’re doing marketing, but what you’re really doing is running ads, supporting riders, and sponsoring contests. Lacking effective marketing, you have no way to judge if you’re running the right ads, supporting the right riders, and sponsoring the right contests.
If you agree with me that you’re now in the fashion business to some extent, your first job is to find out just what part you are in. You have to do some real marketing. You have to find out who your customers and potential customers are and why they buy from you.
Competitor Identification
As soon as you recognize you aren’t just in the action sports industry, but in some (clearly identified) segment of the fashion business as well, then the lists of companies you are competing against changes. Those non board sport participating customers that you are selling to are comparing your product to those of brands that have nothing to do with action sports.   Why might they buy your product? Why will a particular non skating customer buy Brand X of skate shoe rather than a Nike if they are just looking for a comfortable, casual shoe?
Obviously, if this wasn’t an issue skate shoe companies wouldn’t be making casual shoes less closely tied to actual skating.
So, you may have some different competitors. I wonder if those advertisements and promotions being churned out by your non marketing department are as relevant as they once were? You might wonder too. Are you spending all that money in the right place?
Then There’s the Customer
Just who is your customer? For most brands and retailers it’s not just core skaters, or surfers, or snowboarders anymore. It hasn’t been for quite a while. I think we’d all agree on that. If you want to grow your business to a serious size, there just aren’t enough of them around.
Look at your distribution and how it’s changed. There are a lot of clues about your customers there. Go ask your fifty largest customers to describe the person who buys your product. Don’t accept a vague answer. Work to collect some of that data if you don’t already have it.
Consider what you might learn. When you sell to a core participant, your customer tends to be  knowledgeable, function oriented, possibly less price sensitive, and knows about the competitor’s product. When you are selling to somebody who’s a lifestyle customers they are, well, not necessarily like that. They perceive themselves to have choice of brands beyond what the core customer may consider.
This has huge implications for how you advertise and promote your brand. Just as one example, the core customer may recognize and identify with specific sponsored riders and how they perform. The broader market “fashion” customer is less likely to recognize the rider or the trick, but may be attracted to their perception of that rider’s lifestyle and the places they go.
If that’s true should your ads be less technical? Does it change your choice of sponsored riders and how you compensate and present them? Etc.
For most brands and retailers, it’s no longer accurate to say only that, “We’re in the action sports business.” There’s an important and growing (maybe dominating) fashion component to your business, but describing your company as being, “In the fashion business” is too broad a statement to be useful, even though it’s true.
Chuck out the old habits. Recognize that your market is changing, and you have to do some work to figure out how and what that means. It’s no longer handed to you on a silver platter. And if you’re calling your Advertising and Promotions Department “Marketing,” will you please change that? You’re driving me crazy.