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Starting a Retail Business
A retail business must succeed by paying less for the goods it sells than the price it can charge for those goods to its customers. This is a simple concept that any retailer understands as lesson one. Nonetheless, there are several challenges in the execution of this concept.
Control Over Your Cost of Goods Sold
For a retailer, the "cost of goods sold" or COGS is equal to the direct cost of each item sold - the price the retailer pays to purchase the item from its supplier. When starting a new store, you will likely have little control over the prices you are charged from suppliers. In most cases the suppliers will be selling to multiple businesses (perhaps other stores, distributors, maybe even doing some direct selling to customers online). When they have so many options, your suppliers will ignore pressure from you to charge lower prices than they do to others. They may actually charge you more as it is more expensive for them to sell to a small business than in high volumes to big box stores or distributors. However, if you will represent a significant portion of the sales of your supplier, perhaps because they are also a new or local business, your ability to dictate the prices you will pay increases significantly.
Control Over Your Prices
Likewise, a new retail business may only seem to have control over prices it can charge to customers. If competitors are selling the same goods or substitute goods for which customers see little difference except for price, a retailer must set prices in accordance with competitors. Certainly, with the ability of today's customers to check prices from their phones while still in your store, charging more than competitors can drive away your customers if they have no qualms about walking over to your competitor. For the lucky retailer who plans to sell unique products or open in a location where the nearest direct competitors are miles away, the situation may be different.
Living on the Markup
What living on the markup means is that when your COGS is controlled by suppliers and your prices are controlled by competitors, your ability to be profitable relies on your ability to run lean operations. The difference between the revenue you bring in and your COGS (the gross profit) must be enough to cover the fixed costs of the store and leave room for profit for yourself and investors. The fixed costs are called so because they do not increase by selling an additional item or decrease by selling one fewer. These include rent, the depreciation of equipment and improvements to the location, marketing, accounting, insurance, supplies, salaries of all staff, and interest you owe on loans. The more you can keep these costs down, the more gross profit will flow to your bottom line profit.
The first step to starting a retail business is to develop your retail business plan. Growthink provides products and services to help you develop a professional business plan and turn your dream into reality.
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OR, We Can Develop Your Plan For You
Our professional business plan consultants can create your entire business plan for you. We will make sure your business plan is sound and ready for investors so you can continue to focus on running your business. Over the past decade, we have created business plans for hundreds of retail businesses.
To speak with a Growthink business plan consultant, call 800-506-5728 or complete the form below.
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