This article is about selling more inventory and improving inventory buying. David McMahon presents a coordinated approach to age your inventory, mark it down and provide sales compensation incentives to improve profitability.
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Five SMART steps to making money with inventory.
In the June/July issue of FURNITURE WORLD Magazine we looked at the first two SMART inventory steps, “Spotting Winning Items” and “Maintaining Them in Stock a Higher Percentage of the Time”. The premise is simple. Furniture retailers need to carry more best sellers because these items make more sales. And, to do so, you must buy as much new merchandise, as often as possible, in order to find new best sellers. What is not obvious to many managers is that you cannot just keep buying new merchandise without getting rid of non-performing items (dogs) first: the dogs. This brings us to the final three SMART inventory steps which will be the topic of this article. Continuing to buy new while not getting rid of the dogs leads to over-inventory, higher expenses, reduced profits, and cash shortages. Companies with record sales have become insolvent due to this reason alone. Don’t let it happen to you.
SMART Step #3:
Auto-identify and Take Action on Dogs
Auto-identifying your dogs means using your computer system to help you find your dogs. I know what some of you are thinking, “I know my dogs. I don’t need a computer to tell me what items are not making me any money.” That thought can only be true if you either carry under $200,000 in inventory or have a team of people tracking each single SKU on a daily basis. Operations with over $500,000 in inventory can have thousands of SKUs, cover twenty merchandise categories, and have ten to twenty primary vendors. You need to query your merchandise data base to flush out non-performers to enable you to take quick action and increase turns. Here is how you can do it:
- Set up an inventory aging schedule (or markdown code) on your
- Create up to six aging periods in the schedule.
- For each aging period, assign a number of days aged and a desired markdown discount. A typical markdown aging for normally inventoried home furnishing categories is every sixty days. Six periods would be 60 days, 120 days, 180 days, 240 days, 300 days, and 360 days.
• Query your inventory data once per month for all merchandise that are not best sellers. This will allow you to auto-identify your Dogs.
Once you have the information, take action. The Dogs are not going to disappear just because they have been identified. In Example #1 you can see suggested actions to take once merchandise drifts into subsequent aging levels. Actions can be discounting, spiffing the salespeople, a marketing opportunity, or a combination of actions. As the merchandise gets older, take increasingly decisive actions. If, you had a piece of merchandise on the floor for a year, would you return it to the vendor if you could? One hundred percent of clients answer, “Yes!” So, selling a small minority of inventory at or below cost is the same thing and – a customer will be getting a fantastic deal!
The next question I get is, “How do we maximize our margins?”
SMART Step #4: Reward High Gross Margin Sales
One system of paying commissions stands above the rest - variable sliding based on gross margin percentage. This system aligns the goals of profitability for the company with the salespeople’s goals of making the most commission.
Businesses that move from another commission method to one that pays at a variable rate based on gross margin percent experience an immediate 3%-8% jump in gross margin percentage overall. That translates to a huge increase in bottom line profitability.
So if you currently pay out the same percentage of sales regardless of the margin the merchandise is sold at, this will be the fastest and easiest way you will achieve a greater return on your inventory. Your GMROI will sky rocket. This is also true of operations that supposedly don’t discount. So here is how it works:
- If a salesperson sells an item at a higher gross margin percentage, you will pay a corresponding higher commission percentage.
- If a salesperson sells an item at a lower gross margin percentage, you will pay a corresponding lower commission percentage.
- If a salesperson sells an item at an average gross margin percentage, you will pay an average commission percentage.
Moving to Variable Rate Commissions
1. Figure out your percentage of commission on the sale for an average margin sale. By doing this, if nothing changes, everyone gets paid the same and your expense is the same. Refer to Example #2. Note that if an item is sold at a 45% gross margin, there is a 5% commission paid. So, for a $1,000 item, $50 is paid in commission. Very average. Nothing really changes.
2. Set a high gross margin percentage and related high commission percentage. Selling an item at 55% produces a 9% commission, or $90 for a $1,000 item (Example #2). The salesperson will be pleased because they make an extra 4% commission. Your company will by very happy because it makes an extra 10% in GM and extra 6% in profits!
3. Set a low commission percentage and related low commission percentage. The range between the top commission and the bottom commission needs to be at least 5% for variable sliding to work because the incentive is not as strong with anything less than that. In the example, the low commission percentage is 3% at a 40% gross margin sale. If you have a working markdown system in place this will be a minority of items. The salesperson is less likely to discount. They will also STOP bugging the sales manager to lower the price, saving you, the salesperson, and the customer time. Instead of price selling, salespeople will start to use better customer room selling techniques.
4. Set it up right. Do your math right. Make your schedule easy to understand. This is important so everyone fully understands the schedule.
5.Roll it out. Don’t be scared. Tell your salespeople you want to make them partners in your profitability and share more of the gains with them. This is a profit sharing plan. It is a raise! And, for those of you who want to test it first, tell your salespeople that you will run the new system in conjunction with the old way of doing things. Then tell them you will pay them on whichever way makes them the most commission. That will most likely last for one month and the old way will be ancient history.
So, now you know how to spot best sellers and maintain them better. You know how to get rid of dogs faster. And you are going to make a higher gross margin overall doing it!
To gain the biggest benefit you need the highest traffic possible. If you can increase traffic, while practicing the first four SMART steps, you will maximize the impact that the SMART steps have on your overall profitability. The greatest cash flow will be achieved. The final SMART step helps you increase traffic while managing your inventory better. Smart Step #5:
Target Customers in Your Database
The SMART Steps presented so far, cannot be implemented properly without solid retail traffic. The 80/20 principle states that the high majority of your revenue is produced by a minority of your customers. This is not an assumption or guess. Analyze your sales for the past five years and rank them by customer volume. You will likely see the same thing.
That is why knowing your best customers and treating them like gold is so important to any inventory management scenario. They are, in fact, a gold mine. This step is about properly mining the great customer gold mine for repeat business.
First off, this elite group must be treated extra special. Don’t just blast advertise to them. Your best customers should be part of your “VIP club” and receive special notices, gifts, birthday cards or emails, and invitations to private functions.
Segmenting this group separately from the bulk of your database will allow for better communications practices. If you have 50,000 people in your database and you want to have a cocktail party to introduce a new product line, do you want to send out 50,000 invitations? I say no. With this type of event, it is not all about traffic numbers. It’s about the right traffic. You will be better off sending 1,000 personal emails gathered from your salespeople. When your best customers come to the private event, you will actually be able to spend some time with them and properly determine their needs. That’s better than a showroom full of discount seekers, right?
Other than hosting a private VIP sale, there are other key targeted messages that should be sent via email, text, or snail mail to your customers. The purpose is to touch your customer more often with a real reason rather than just the same old holiday weekend discount. Remember, these messages should not go out to your entire data base. You must segment for relevancy. Here are some examples:
- Thank you for visiting our store. Do you have any other
- This message can be sent to anyone who gives you their information, whether they bought or not. It encourages customers to think of you first while they are shopping around.
- Price quote and special information attached.
- Send a message after a quote has been written up with all the necessary information. This is a great follow-up tool. The more quotes you give, the higher your sales will be – if you follow up.
- Thank you for your purchase – here is a copy
of your sales receipt.
- This message should be sent after each sale. This gives customers a contact name and number should they have any questions or need something else.
- Special order update inside.
- Every customer wants to know the status of their order. Send them a message like this and it will save them time and make you look like you are really taking care of them.
- Your merchandise is ready. Open to request delivery
or pick up.
- Many customers now prefer to do business via email rather than telephone. People don’t like wasting time with telephone tag. Give your customer the gift of convenience.
- Delivery reminder with date and time.
- Send a reminder that goes right into your customer’s smart phone. They will see that you are an innovative business.
- Take our Satisfaction Survey and get a gift card.
- After the delivery or pick up, send them a three question survey. You will build valuable information over time. Don’t forget to ask them: “What is your next home furnishings project?”
- Help for your next project.
- So now that you have some information on their next project, contact them to give them some ideas. And don’t forget the telephone! It’s still one of the most underutilized direct media devices.
- Mattress ideas for your new
- You should contact people that bought bedroom sets and did not buy mattresses, for example.
- Some area rugs that will make your new living room amazing.
- You can contact those who bought living room sets without area rugs offering purchase ideas for their new living room.
- We miss you – here is a gift!
- Search your past purchase information by last date of purchase.
- Locals night only.
- It may be a local community that brings people together. Divide your audience by their zip codes and send special messages.
- Room planning demonstration.
- This may be one for your VIP list. Why not teach your customers how to use your online room planner. Guess what? If you do this, you will have some customers who are better at it than you! You can even host a free design webinar for your customers.
- Free workshop: How to
accessorize your home.
- Another one for your VIP list. Offer workshops on home style and décor.
- Fans of Italian Furniture – Have a glass of wine or cappuccino and view the latest introductions from Milan.
- You may be surprised at the following that some vendors have.
- Happy birthday gift!
- Most people love to be remembered on special occasions. It’s pretty much a guarantee open.
One common question, I get is, “Isn’t this too many messages?” No it isn’t. If you target properly and do it professionally, it will work. Touching your customers more equals higher traffic. On the flip side, if you send these messages to everyone, they will appear to be blasts and get fewer results. Be relevant.
Bottom line: Get to know your customers. Use targeted mediums such as email, the telephone, text, and direct mail to do so. Mass media is advertising. This is relationship marketing. Targeting allows you focus on developing long term relationships on a more personal level with the right people. When a customer becomes a friend then they become a customer for life.
David W. McMahon is an inventory management and operations expert. Questions about any aspect of retail operations management or for help implementing the 5 SMART Steps in your business contact David care of FURNITURE WORLD at email@example.com or call him direct at 800-888-5564.
David McMahon is a Certified Management Accountant and Consultant with PROFITconsulting, a Division of PROFITsystems. Questions about this article, or to request a similar analysis on your financial statements contact him at Davidm@furninfo.com or call 8oo-888-5565.
View all articles by David McMahon