The ATA’s 2019 member survey asked: “What’s the biggest educational or training need for industry retailers?” Many members replied: understanding profit margins.

We spoke with Randy Phillips, owner of Archery Headquarters in Chandler, Arizona, for insights from his 30 years in business. Phillips said he lost profits in his first three years because he didn’t fully understand profit margins. Since then, he’s run a successful and efficient pro shop.

In this article, Phillips defines profit margins, how they’re calculated, and why they can frustrate retailers, as well as how to build more profits into your business.

 

Defining and Calculating Profit Margins

To start, let’s define “profit” as a financial gain. It’s the difference between an amount you earn and what you spent buying, operating, marketing and producing something. In short, it’s money you keep or invest after paying your bills.

In turn, “profit margin” is the ratio of a company’s profit to revenue. Profit is measured in dollars, and profit margin is measured as a percentage. Your margin must be more than what you paid for the product and overhead expenses to make a profit.

Phillips said retailers should also know the difference between gross profit margin and net profit margin, which are calculated differently. According to Investopedia, the gross profit margin formula is net sales (how much you sold the product for after sales returns and discounts) minus the cost of goods sold, divided by net sales, and finally multiplied by 100. So, if you buy a product for $80 and sell it for $140, you calculate 140 minus 80 divided by 140, which gives you 0.4. Multiply that by 100 to get your gross profit margin of 40%.

The formula for net profit margin is net income divided by net sales, multiplied by 100. Calculate net income by subtracting the item’s selling price by your product cost, operating expenses, interest, taxes and other expenses. Using the same product costs as above, your calculation is $140 (selling cost), minus $80 (product cost), minus $20 (an estimate for taxes, marketing and other overhead expenses). That gives you $40 (net income). Divide that by $140 (net sales), and you’ll get 0.28. Multiply that by 100 to get your net profit margin, which is 28%.

Calculating overhead expenses for one item is hard. You can, however, calculate your net profit margin for specific time periods, such as a month or quarter. Here’s the calculation for a retailer who does $10,000 in monthly sales, paid $6,000 for those products, and has a monthly overhead of $2,000. Subtract overhead ($2,000) and cost of goods sold ($6,000) from your revenue or net sales ($10,000), and then divide by net sales ($10,000) to get 0.2, which you multiply by 100 to get your monthly net profit margin of 20%.

Phillips said many retailers think they’re making the gross profit margin, which would be 40% in the example above. In contrast, they only make the net profit margin, which was 28%, or 20% in the monthly example. “People forget to factor in other business expenses like their overhead costs, and don’t realize their error until it’s too late,” Phillips said.

That mistake is one of these five common profit margin errors:

1. They weren’t taught about profit margins.
2. They don’t dedicate time to calculating their margins.
3. They don’t factor in overhead costs when determining profit margins.
4. They confuse profit markup with profit margin.
5. They think a 1% or 2% difference doesn’t matter.

Once you identify your mistake(s), you can learn from them and improve your business. Now, let’s learn how to boost your profit margins and craft a plan that ensures your business is profitable.

Increasing Margins

It’s normal for products to have different margins. Some margins, after all, are influenced by a manufacturer and based on its minimum advertised price policy or the manufacturer’s suggested retail price. Phillips said most profit margins on bows are 27%, but most profit margins on bow accessories are 40%.

When you buy an item at the ATA Trade Show, the manufacturer gives you a product price, as well as the product’s MAP price. You can calculate the profit margin using formulas or by using a profit-margin calculator, which is free online or in an app store. Once you know the product’s profit margin, you can buy or pass on the product. If you really like the product, but its margin is small, you can increase the margin in one of two ways, Phillips said. One, get a lower price on the product. Or two, add a service to the product to increase its price. Each concept is explained below.

1) Get a cheaper price

To get a cheaper price on a favorite product, retailers can buy in bulk, negotiate prices, buy directly from the manufacturer, or join a buyers group to receive the manufacturers’ best wholesale prices.

2) Add a service to the product to increase its value

Attach a service to the product to increase your price and add value to your customer’s purchase. Phillips and his team, for example, fletch arrows sold at Archery Headquarters to put a special helical on them. That slight twist to the fletching helps AH’s arrows fly better than factory- or standard-fletched arrows sold online.

 

Develop a Plan/Process

It’s essential to learn how profit margins work and understand their role in your business’s overall health. Use these profit margin tips to boost your profits:

• Analyze your business: “The fastest way to make money is not to spend it,” Phillips said. Analyze your business to learn how to operate more efficiently. Cut unnecessary costs to eliminate overhead expenses that eat into your margins.
• Learn how to sell products: Selling more products (if your margins are substantial) helps increase your overall profits. Read the ATA article “Don’t Just Stock Products, Sell Them” for tips.
• Change your mindset: Phillips said retailers must think about profit margins whenever buying products, and never buy before calculating those margins.
• Make product sacrifices: Phillips only buys, sells and promotes products with good margins. “I’ve been excited about products but opted not to buy them because there was no way I could make money off them,” he said.
• Charge for services: Phillips said a shop’s services — lessons, classes, repairs and maintenance work — are the most valuable part of a profit margin’s equation. “People think they have to give away service to get business, but the truth is you can’t buy service on Amazon,” he said. “You have to place high value on that.” You must charge people for the services they use. Those charges help offset low margins on other products. “It’s a balancing act,” Phillips said.
• Get help: Profit-margin miscalculations can crumble a business. If you lack the experience or know-how to keep your business profitable, get help. Hire a professional accountant or an experienced consultant. These pros can help you avoid math errors and financial chaos. You can also take a profit margin course.

Questions? Contact Kurt Smith, ATA’s director of industry relations, at (717) 478-5919, or kurtsmith@archerytrade.org.

To learn more ways to boost profit margins, explore the MyATA Learning Center’s classes. Please log in to your MyATA member dashboard and click “MyATA Learning Center” to start.