What is a good profit margin for retail stores?

The retail industry has seen an incredible transformation over recent decades. In the past, people shopped at several niche stores for specific goods. These days, we often go to one supermarket for everything from clothes to food. 

With the appearance of these superstores comes increased competition. For small businesses and other stores to stay open, retail profit margins are important now more than ever. 

But, what is a good profit margin for retail stores? Does it matter if you sell in-store or online? 

Let’s find out!

The importance of profit margins

All businesses need to earn a profit. Understanding profit is simple; it’s the pure income generated after all expenses. 

Profit margins are a little bit different. Margin is the percentage difference between the cost basis of a product and the selling price. 

Example: A hat costs $10 from the supplier. The retail store will list the hat at $15. $15 - $10 = $5. 5/10 is 50%. Therefore, the hat has a 50% profit margin.

How can margins make or break a business?

When looking at profit, businesses need to think about the percentage value instead of dollars. 

A store can sell something for $10,000 but only make a 1% return. Other stores can sell something for $5 and make a 200% return. In this case, the latter store is more profitable.

On top of the unit cost, retailers need to focus on other expenses: 

• Utilities: Electricity, water, and other services needed to stay open.
• Payroll: Don’t forget about wages and associated taxes
• Rent: Whether you lease or own your building, you will have monthly payments.
• Administrative fees: Legal services, accountants, and more can cut into your profit potential.

It is important to factor all of these costs into your retail profit margin to ensure your business stays in the black. Failure to plan for even one-time payments can leave you with a nasty surprise.

Retail profit margins by business type

All businesses are different, but there are some general factors at play. For example, in-person retail practices differ from those of online stores.

CNBC and AlixPartners created sample scenarios that evaluated how margins are affected by different business models. In the example, a store-bought a shirt for $40 and sold it for $100. 

Here’s how much profit each store generated:

• Online: 30% return
• In-store: 32% return
• Order Online and Pickup In-Store: 23% return
• Order Online and Ship from Store: 12% return

Let’s look at what factors affect these margins and how to approach them.

Online

E-commerce stores do not have as much overhead as retail locations. They typically do not need expensive storefronts or many staff members to operate. 

However, their online stores have unique expenses that still cut into their margins. Managing a website can be expensive, and warehouses still use utilities. On top of this, many customers want free shipping and low prices. Even if a customer is saving one or two dollars, they will leave one website for another to get that better deal.

Shopify states that a respectable profit margin for an online store is 10%, and anything around 5% is to be considered low. 

In-store

Traditional retailers have to account for typical expenses like rent and utilities. They also must pay for deliveries from suppliers, and invest in some traditional marketing materials.

That said, the actual sales process is rather hands-off. Customers browse and collect their own goods, and then bring them to the checkout counter. The only packaging costs are for paper/plastic bags.

Since retail stores cater to a wide range of consumers, profit margins vary. There is no ideal percentage, but values typically range from .5% to 7.5%. 

Order online, pickup in-store

For many people, buying something online and picking it up in-store is often the best way to shop. This model saves money for the store and consumer since it avoids packaging and shipping costs. 

While letting your customers pickup goods at the store doesn’t require much effort, you still need to pay for online ordering functionality and other e-commerce costs.

Since this model blends online and in-store aspects, standard profit margins range between 2% to 5%.

Order online, ship from store

Many business owners want to use their store as a shipping hub for their e-commerce site, but it actually can be quite inefficient. Retailers theoretically will pay shipping twice. First to send the product to the store and second to send it to the customer. Likewise, your employees will spend time stocking shelves only to unstock items and pack them for shipping. 

If you run a ship-from-store model, your profit margins can suffer. It can feel like you are running two businesses at the same time. 

Maximise profit potential with Epos Now

To minimise unnecessary expenses and double work, you need the right tools for the job. No tool is greater than your point of sale system. An outdated or expensive POS can cause you untold financial losses and opportunity costs.

The Epos Now retail POS can manage your entire store and synchronise with your e-commerce website. It gives you everything you need to stay profitable no matter what model you embrace. 

With Epos Now, you can:

• Manage online and in-store products: Any product added to your store can automatically be listed on your website. 
• See reports in real-time: You can access your Back Office and see live data from any device, anywhere.
• Leverage marketing tools: Expand your reach with Mailchimp and other platforms to stay top of mind.
• Ensure security: All data is kept safe on cloud servers, protecting against theft, corruption, and disasters.

Speak with a consultant from Epos Now to learn more.