What Is a Good Retail Profit Margin?

U.S. retailers have experienced steady growth over the last decade, albeit at an average of only 3.6%. And, looking ahead, no change is expected in that growth trajectory. Although 4% sales growth for an industry of more than $5 trillion is nothing to scoff at, rising costs have caused many retail business leaders to turn their focus to profitability. Consequently, even seasoned retail veterans are asking, “What is a good retail profit margin?” and the natural follow-up: “How can we increase it?” This article helps to answer those questions by exploring the key factors that influence retail profitability, then offers a bakers’ dozen of practical strategies for how retailers can leverage these factors to their advantage.

What Is Retail Profit Margin?

Retail profit margin measures the percentage of revenue retained as profit after accounting for merchandise, operating, and other business costs. Gross profit margin is particularly crucial, as it reflects the core of a retailer’s business model—sales revenue minus the direct cost of goods. Higher margins directly improve profitability and indicate financial health. Comparing profit margins with those of competitors and against industry benchmarks allows retailers to gauge their relative standing and identify areas for improvement.

Profit margins vary by company size, retail subsegment, and economic conditions. Large retailers leverage economies of scale for better supplier pricing, while smaller retailers may sustain higher margins through niche markets. Luxury retailers typically have higher margins than discount stores, and building supply retailers achieve margins nearly 60% higher than automobile dealers.

Maintaining strong margins is challenging due to competition, price wars, economic downturns, shifting consumer preferences, and rising costs. Successful retailers adapt pricing strategies and cost controls to protect profitability.

Key Takeaways

• Retailers analyze their profitability using three different types of profit margin: gross profit, operating profit and net profit.
• Internal factors intrinsic to a retailer’s business model, such as cost of goods sold and operating expenses, significantly affect retail profit margins.
• External factors, such as competition and seasonal demand fluctuations, also shape retail profit margins.
• Leveraging technology and automation can significantly increase profit margins by streamlining operations, enhancing customer experiences and driving efficiency.

Types of Profit Margins

There are three main types of profit margins that most businesses, including retailers, should track and analyze: gross profit margin, operating profit margin, and net profit margin. Each offers valuable insights into different aspects of a company’s financial performance and profitability. To avoid confusion when discussing profitability, it’s essential to understand the difference between profit and profit margin: Profit is the dollar amount of money a business has left after subtracting expenses from its revenue; profit margin is a percentage that measures what portion of the company’s total revenue is represented by that amount. Profit margin provides an assessment of a company’s profitability by considering the relationship between revenue and expenses and is, therefore, more useful when making comparisons.

Regardless of the type of profit margin, a higher percentage is better because it indicates that a company is more efficient at converting sales into profits.

• Gross profit margin: Gross profit margin is the percentage of revenue that remains after deducting the cost of goods sold (COGS)—that is, the direct costs associated with acquiring merchandise and getting it ready for sale to customers. Gross profit margin measures the core profitability of a company’s products before accounting for any other expenses. Retailers can use gross profit margin to help them set prices. It is also useful in identifying what percentage of revenue can be contributed to cover other business costs. This metric allows the purest comparisons to industry benchmarks and prior periods. A negative gross profit margin indicates that a business loses money on every sale and is unsustainable over the long term. The formula for gross profit margin is:

Gross profit margin = [(Total revenue – COGS) / Net revenue] x 100

• Operating profit margin: Operating profit margin measures the percentage of revenue that remains after deducting COGS and all operating expenses, such as sales and marketing costs, rent, administrative expenses, and utilities. It is a more comprehensive measure than gross profit margin, as it includes all the necessary costs of doing business (other than taxes, interest expenses, and nonrecurring gains and losses). Operating profit margin is a useful metric for evaluating a retailer’s operational efficiency and management effectiveness. It helps businesses assess how well they are controlling all costs in relation to the revenue generated from their primary activities. The formula for operating profit margin is:

Operating profit margin = [(Net revenue – COGS – Operating expenses) / Net revenue] x 100

• Net profit margin: Net profit margin represents the ultimate profitability of a business and the portion of revenue that can be reinvested into the company, distributed to shareholders, or paid out to owners. Specifically, net profit margin reflects all expenses, including COGS, operating expenses, taxes, interest, and any others not directly related to the company’s core business activities. A higher net profit margin indicates that a company is effectively managing all of its costs, because even nonoperating expenses can significantly impact a company’s bottom line. Ineffective management of these costs can lead to profit margin leakage. The formula for net profit margin is:

Net profit margin = (Net income or loss / Revenue) x 100

Retail Profit Margins Explained

To illustrate the various retail profit margins, consider the fictional Stephen’s Style Studio, a small clothing store owned by entrepreneur Stephen Michaels. Stephen’s Style Studio generates $500,000 in annual revenue from its sales of trendy men’s clothing and accessories. The store’s COGS, which includes the expenses directly related to acquiring the merchandise from suppliers, as well as incoming delivery and tagging costs, totals $300,000 per year. To determine the store’s gross profit margin, Stephen uses the gross profit margin equation shown above. He starts by subtracting the business’s COGS from its total revenue ($500,000 – $300,000) to calculate his gross profit of $200,000. He then divides that result by total revenue and multiplies the result by 100 to obtain the percentage:

Gross profit margin = [($500,000 – $300,000) / $500,000] x 100
Gross profit margin = 40%

This means that for every dollar of sales, Stephen’s Style Studio makes 40 cents as gross profit after accounting for the cost of merchandise. Comparing this result with that of other clothing shop owners, Stephen sees that 40% is a higher gross profit margin than most of his competitors enjoy. He investigates and learns that he is getting better rates from his preferred wholesaler due to the volume of items he orders and by taking advantage of prepayment discounts.

However, the gross profit margin doesn’t take into account $150,000 related to other operating expenses that Stephen incurred for rent ($75,000), utilities ($12,000), salaries ($45,000), marketing ($10,000), and miscellaneous ($8,000). To calculate the operating profit margin, Stephen uses the operating margin equation shown above, which subtracts these operating expenses from the gross profit to yield an operating profit of $50,000, which is then divided by total revenue:

Operating profit margin = [($500,000 - $300,000 – $150,000) / $500,0000] x 100
Operating profit margin = 10%

This means that for every dollar of sales, Stephen’s Style Studio makes 10 cents as operating profit. He notes that operating profit has gone down in the current year because of increased lease costs.

Finally, to determine the store’s net profit margin, Stephen accounts for taxes ($7,000) and interest expenses from a revolving line of credit ($3,000). He subtracts those from the operating profit to yield a net profit of $40,000, then applies the net profit margin equation:

Net profit margin = ($40,000 / $500,0000) x 100
Net profit margin = 8%

In this example, Stephen’s Style Studio has a gross profit margin of 40%, an operating profit margin of 10%, and a net profit margin of 8%. By understanding these different profitability metrics, Stephen can better assess his business’s performance and pinpoint areas for improvement, such as renegotiating his lease or reducing his use of the line of credit.

What Is Considered a Good Retail Profit Margin?

There is no one-size-fits-all answer as to what constitutes a good retail profit margin, because many different factors can influence any given retailer’s results. But understanding the average profit margins prevalent in the retail sector can be a useful starting point for assessing a company’s individual financial performance.

According to data from New York University’s Stern School of Business, as of January 2024 the average gross profit margin for general retail was 30.9%, with a 4.4% average operating profit margin, and an average net profit margin of 3.1%. However, these figures can vary depending on the specific retail subsector. To illustrate, grocery retail posts an average gross margin of 25.5%, an operating margin of 2.4%, and a net margin of 1.2%, while retail building supply has an average gross margin of 34.2%, an operating margin of 12.5%, and a net margin of 8.4%. To help determine whether their company’s profit margins are healthy or in need of improvement, retailers can conduct various types of analyses, including:

1. Industry benchmarking: Compare the company’s profit margins to industry averages and the margins of direct competitors.
2. Trend analysis: Monitor the company’s profit margins over time to identify trends and potential areas of concern, such as steadily declining margins.
3. Break-even analysis: Determine the minimum sales volume required to cover all costs and start generating a profit to help set sales targets and pricing strategies.
4. Sensitivity analysis: Assess how changes in key variables, such as product prices or sales volume, would impact profit margins.
5. Scenario planning: Develop best-case, worst-case, and most likely scenarios based on different assumptions about market conditions and company performance to stress-test profit margins and develop contingency plans.

Analyzing profit margins helps retailers set realistic goals and identify areas for improvement. If gross profit margins are below industry averages, businesses may need to renegotiate supplier contracts, optimize inventory, or adjust pricing. A declining operating profit margin may signal the need for cost-cutting, process optimization, or technology investments.

Retail markup, a key factor in profit margins, determines selling prices by adding a percentage to product costs. So, if a retailer buys a product for $60 and sells it for $100, the markup is 67% [($100 – $60 / $60) x 100]; and, in this example, the gross profit margin, which is expressed as a percentage of selling price, would be 40% [($100 – $60 / $100) x 100]. A common rule of thumb is a 50% markup, but setting the right balance is crucial. High markups may drive customers to competitors, while low markups can make it difficult to cover costs and sustain profitability.

Factors Affecting Retail Profit Margins

Retail margins are shaped by macro and business-specific factors. Macroeconomic trends like consumer confidence, inflation, and trade policies impact profitability—lower consumer spending pressures retailers to cut prices, while inflation raises costs, forcing retailers to absorb expenses or pass them on.

At the business level, market positioning plays a key role. Premium brands can command higher margins, while value-based retailers rely on volume and efficiency. Customer price sensitivity also affects pricing strategies and profitability. Understanding the elasticity of demand for a company’s products is essential in determining an optimal pricing strategy and profit margins. Retailers offering essential products with few substitutes may command higher margins, while those in highly competitive markets may need to keep prices and margins lower to remain competitive.

The fundamental factors that influence profit margins and should be incorporated into a holistic profit margin analysis include:

• Cost of goods sold (COGS): COGS is the direct cost of producing or acquiring the products that a retailer sells. COGS includes expenses such as raw materials and labor, footed by retailers that manufacture their own goods, or the merchandise purchase costs and inbound shipping costs for those who don’t. If all other factors remain constant, a higher COGS will result in a lower gross profit margin because it reduces the difference between the selling price and the product’s cost. Retailers can improve their profit margins by negotiating better prices with suppliers, optimizing inventory management, and implementing more efficient production or sourcing processes.
• Operational expenses: Operating expenses, such as rent, utilities, salaries, and marketing costs, affect a retailer’s operating profit margin. These expenses are not directly tied to the production or acquisition of products but are necessary for running the business. Retailers must carefully manage a wide variety of operating expenses to avoid them eating into their profit margins. Strategies for reducing operational expenses include negotiating favorable lease terms, implementing energy-efficient practices, optimizing staffing, and developing cost-effective marketing campaigns.
• Competition: The level of competition in a retailer’s market or geographical area can have a significant impact on their profit margins. In highly competitive markets, retailers may need to lower their prices to attract customers, which can reduce gross profit margins. On the other hand, retailers with unique product offerings or a strong brand reputation may be able to command higher prices and maintain healthier profit margins. To mitigate the impact of competition, retailers can focus on differentiating their products or services, providing exceptional customer experiences, and building brand loyalty.
• Product pricing: Product pricing is a primary factor affecting a retailer’s margins. Setting prices too low can result in insufficient profit margins, while setting prices too high can cut into sales. Retailers must find the right balance between price and demand to optimize their profit margins. Factors involved in the pricing process include COGS, retail markup, targeted profit margins, competitor pricing, and perceived value to customers. Regularly reviewing and adjusting prices in light of market conditions and consumer demand can help retailers maintain healthy profit margins.
• Seasonal demand fluctuations: Many retailers experience fluctuations in demand due to seasonal factors, such as holidays, weather patterns, or fashion trends. These fluctuations can reduce profit margins, as retailers may need to lower prices or offer promotional discounts to move inventory during slow periods. Conversely, during peak seasons, retailers may be able to command higher prices and achieve higher profit margins. To navigate seasonal demand fluctuations, retailers should develop a demand planning process, implement flexible pricing strategies, and refine inventory management to help ensure that they will have the right products in stock at the right time.
• Sales volume: Sales volume influences retail profit margins in several ways. First, higher sales can help spread fixed costs across a larger number of units sold. Second, retailers with high sales volumes may be able to negotiate better prices from suppliers. Third, higher sales volume can provide retailers with more opportunities to cross-sell and upsell products, further increasing their revenue and profit margins. Some methods for driving sales volume include targeted marketing and promotional strategies, providing exceptional customer service, and continually adjusting the product mix to meet current customer demands.
• Marketing and advertising: Effective marketing and advertising activities can help retailers improve margins in multiple ways, like driving higher sales volume, supporting pricing decisions, and luring customers away from competitors. But ineffective marketing and advertising can add to operating costs without returning those benefits. So, it is essential for retailers to ensure that their marketing and advertising efforts are generating a positive return on investment. To avoid ineffective or overly expensive marketing campaigns, retailers can develop targeted campaigns that resonate with their ideal customers, track key performance indicators (KPIs) to measure the effectiveness of their efforts, and continually refine their strategies based on data-driven insights.

13 Strategies to Improve Retail Profit Margins

If only improving margins was as simple as raising revenue and cutting costs! In practice, it’s more like solving a complex puzzle whose pieces are in constant motion. Each piece of the puzzle represents a different aspect of the business: pricing strategy, inventory management, customer experience, or marketing efforts, to name a few. To solve the puzzle, retail managers must zoom in on the individual pieces, use data-driven insights to make precise, targeted adjustments, and then step back to examine the effects of their changes on the bigger picture of how all the pieces fit together. It’s a delicate balance of high-level strategic thinking and granular tactical execution, requiring a keen eye for detail and a willingness to adapt to the evolving retail landscape.

The following 13 strategies include many common approaches along with best practices and potential pitfalls. They can serve as a good guide for getting started.

1. Optimize COGS

Optimizing COGS starts with identifying opportunities to reduce the direct costs of acquiring or producing the products a retailer sells. This can mean negotiating better prices with suppliers, improving inventory management, or streamlining production or sourcing processes. Reducing COGS directly improves a retailer’s gross profit margin. Therefore, by lowering COGS, retailers can either maintain their current pricing and enjoy higher profit margins or pass some of the savings on to customers to drive higher sales volume.

Common approaches to improving COGS include:

• Negotiating better pricing terms with suppliers, based on factors such as order volume, payment terms, or exclusive partnerships.
• Implementing just-in-time (JIT) inventory management to reduce carrying costs and minimize the risk of overstocking or obsolescence.
• Exploring alternative sourcing options, such as direct-to-consumer channels or private label products, to trim intermediary costs.
• Investing in technology solutions to sharpen inventory tracking, demand forecasting, and replenishment processes.
• Regularly monitoring and analyzing COGS to identify trends and anomalies.

A primary pitfall to avoid when attempting to reduce COGS is a perceptible loss of product quality. Instead, retailers can prioritize quality when exploring alternative sourcing by conducting thorough quality checks and establishing clear quality-control processes. For current suppliers, retailers can encourage open communication about quality expectations and work collaboratively to find cost-saving solutions that don’t compromise product quality.

2. Control Operational Costs

To control operational costs, retailers must identify and minimize their expenses of doing business that are not directly related to the production or acquisition of goods. By keeping such operating costs in check, retailers can improve their bottom line without necessarily increasing sales. There are many ways to approach this tactic, due to the varied nature of operating costs. Here are a few:

• Negotiate better lease terms for retail space or consider relocating to a more cost-effective location.
• Implement energy-efficient practices to reduce utility bills, such as using LED lighting or installing programmable thermostats.
• Optimize staffing levels and schedules to minimize labor costs without compromising customer service.
• Evaluate and renegotiate contracts with service providers, such as cleaning and security companies, to secure more favorable rates.
• Leverage technology to automate processes and reduce manual labor costs.

Two best practices to help reduce operating costs are conducting regular audits and engaging employees in cost-saving efforts. Performing periodic audits of operational expenses helps identify and correct costs that may have crept up over time. Encouraging employees to suggest ideas for reducing operational costs and rewarding them for successful implementations can foster a culture of continuous improvement and cost-consciousness.

3. Enhance Inventory Management

Since inventory is the single largest cost for retailers, it is vital for them to put in place an effective inventory management system to track, manage, and replenish stock—and to upgrade that system as needed. This helps retailers minimize inventory carrying costs, reduce the risk of lost revenue from stockouts, avoid tying up more cash than necessary in inventory, and decrease the likelihood of damage, obsolescence, and waste. Optimal inventory management also helps to keep customers satisfied by meeting their demand with products in hand. Some common approaches:

• Implement a robust inventory management system that provides real-time visibility into stock levels, sales trends, and supplier lead times.
• Use data analytics and forecasting tools to predict demand more accurately and enhance procurement processes.
• Establish clear inventory policies and procedures, such as setting appropriate reorder points and safety stock levels.
• Conduct regular inventory audits to identify shrinkage and slow-moving items.
• Collaborate with suppliers to improve order accuracy and reduce lead times.

Beyond investing in the right inventory management software, it is beneficial to invest in employee training on inventory management best practices, to minimize errors. It is also helpful to encourage collaboration among sales, purchasing, and warehouse teams to align inventory management efforts with overall business objectives and customer needs.

4. Optimize Pricing

Optimizing prices involves striking the right balance between maximizing profitability and maintaining competitiveness. It requires regularly reviewing and adjusting prices on the basis of market conditions and customer demand. Effective pricing strategies directly affect profitability by ensuring that retailers are capturing the maximum value for their products while still attracting and retaining customers. Such optimized pricing can help improve gross profit margins and increase sales volume. It may be worthwhile to consider implementing dynamic or value-based pricing.

• Dynamic pricing: This is a pricing approach that adjusts prices in real time in response to factors such as demand, competition, and inventory levels. A familiar example is airline pricing, where prices go up when demand is high and competition and inventory are low.
• Value-based pricing: With value-based pricing, a retailer sets prices according to the perceived value of the product or service to the customer, rather than at cost plus a set retail markup. Put simply, it means charging the amount people are willing to pay.

Generally, the following practices help retailers optimize pricing and improve profit margins:

• Conducting regular price audits and competitor analyses to ensure that prices remain competitive and profitable.
• Segmenting customers by their willingness to pay and offering targeted promotions or discounts to drive sales.
• Leveraging data analytics to measure the effects of pricing changes on sales and profitability.

Alienating customers is a key pitfall to avoid when optimizing prices. It is important to monitor market trends and customer feedback and adapt accordingly. When implementing value-based pricing, clearly communicate the unique benefits and value proposition of the product or service to justify the price point.

5. Evaluate Product Performance

Poor product performance erodes profitability over the long term, so it is important to regularly assess the sales levels of, and customer satisfaction with, individual products or product categories. By identifying high-performing and underperforming products, retailers can adjust product assortment, pricing, promotion, and inventory levels. Focusing on high-performing products and revamping or eliminating underperforming ones can significantly improve overall profitability by allocating resources more effectively, reducing costs associated with slow-moving inventory, and capitalizing on products that drive sales and customer loyalty. Typical ways to evaluate product performance include:

• Implementing a robust product performance tracking system that monitors key metrics, such as sales volume, gross profit margin, and inventory turnover.
• Conducting regular product reviews and using data analytics to identify trends, seasonal patterns, and customer preferences.
• Establishing clear performance thresholds and criteria for determining which products to keep, revise, or discontinue.
• Gathering customer feedback through surveys, reviews, and social media to assess product satisfaction and complaints.
• Collaborating with suppliers and internal teams to enhance product design, packaging, and pricing by tracking performance insights.

When making decisions based on product performance, it is crucial to consider the long-term impact those decisions may have on customer loyalty and brand reputation. While discontinuing underperforming products might improve short-term profitability, it could alienate customers who rely on those products. Engaging teams from marketing, sales, product development, and customer service can help retailers gain a holistic view of product performance to avoid such negative outcomes.

6. Diversify Product Range

Diversifying your products on offer can mean introducing new product categories, offering complementary products, or expanding into new markets or customer segments. A well-diversified product range can positively affect profitability by attracting new customers, increasing average order value, and reducing the risk of overreliance on a single product or category. It can also help retailers capture more cross-selling and upselling opportunities, driving incremental sales. To do so, consider:

• Conducting market research to identify untapped product categories or emerging customer needs.
• Analyzing customer purchase patterns and feedback to identify opportunities for product line extensions or complementary offerings.
• Collaborating with suppliers to develop exclusive or private-label products that differentiate you from competitors.
• Testing new products through limited-time offers, pop-up shops, or online exclusives to gauge customer response and minimize risk.
• Leveraging customer data to tailor personalized product recommendations to customers’ individual preferences.

When diversifying the product range, ensure that new offerings align with your brand identity, values, and customer expectations to maintain a cohesive brand experience. Also, establish a process to closely monitor the performance of new products and adjust inventory levels accordingly. Failing to do either of these can result in profit margin erosion.

7. Boost Sales Volume

As in the saying “a rising tide lifts all boats,” boosting sales volume can increase all profit margins. Higher sales volume improves economies of scale, which reduces overhead costs per item. It can also help retailers negotiate better terms with suppliers, like bulk discounts. Retailers look to boost sales by attracting new customers, encouraging repeat purchases, and incentivizing customers to buy more items per transaction. Tactics to achieve that involve:

• Implementing targeted marketing campaigns to raise brand awareness and attract new customers.
• Offering promotions, discounts, or loyalty programs to incentivize repeat purchases and increase customer retention.
• Optimizing store layout (physical or online), product placement, and visual merchandising to encourage impulse purchases and upselling.
• Providing exceptional customer service and personalized recommendations to build customer loyalty and drive word-of-mouth referrals.
• Expanding sales channels to reach a wider audience and capture additional market share.

Boosting sales volume should be addressed thoughtfully. Monitor trends to assess changes in customer preferences, competitors’ activities, and market conditions to identify opportunities; then, tailor sales strategies to capture those opportunities. However, don’t forget to balance discounts with profitability. While promotions and discounts can drive sales volume, be mindful of their impact on profit margins and ensure that they are strategically targeted and time-limited to maintain overall profitability.

8. Apply Cross-Selling and Upselling

Cross-selling involves suggesting complementary products to customers based on their current purchases, while upselling entices customers to purchase higher-value or premium versions of the products they are considering. Both of these strategies aim to increase the average value of every customer order and the company’s overall sales revenue. They can also increase customer loyalty by providing relevant and personalized product recommendations. In general, it’s more profitable to sell more to current customers than to increase foot traffic or page views. A few suggestions for applying cross-selling and upselling techniques are:

• Train sales staff to identify cross-selling and upselling opportunities and to respond with personalized product recommendations.
• Implement product bundling or “frequently bought together” suggestions to encourage customers to purchase complementary items.
• Use customer data and purchase history to deliver targeted cross-sell and upsell offers through email, mobile apps, or personalized online recommendations.
• Offer incentives, such as discounts or loyalty points, for customers who purchase higher-value or bundled products.
• Showcase customer reviews, testimonials, or product comparisons to highlight the benefits of premium or complementary products.

The primary pitfall to avoid when cross-selling/upselling is frustrating the customer by coming across as too pushy. Making sure that the cross-selling/upselling efforts are relevant and valuable vis-à-vis the initial purchase helps to keep the interaction positive.

9. Leverage Technology and Automation

Adopting digital tools and automated systems that streamline operations, enhance customer experiences, and drive efficiency can significantly increase profit margins. For quick improvements, choose technology that reduces manual labor and minimizes errors. More sophisticated technology tools improve profitability by unlocking valuable insights into customer behavior, sales trends, and operational performance. Examples of proven solutions in the retail sector are inventory management systems, customer relationship management (CRM) software, and data analytics. To leverage such technology retailers may:

• Implement a centralized inventory management system to optimize stock levels, automate procurement, and reduce carrying costs.
• Use CRM software to manage customer interactions, track sales leads, and deliver personalized marketing campaigns.
• Invest in data analytics tools to gain insights into customer preferences, product performance, and market trends.
• Automate routine tasks, such as order processing, invoicing, and customer service inquiries, to free up staff time for higher-value activities.
• Adopt mobile technologies, such as mobile point-of-sale systems or customer-facing apps, to enhance the in-store experience and enable seamless omnichannel shopping.
• Achieve all of these and more with an enterprise resource planning (ERP) system that integrates multiple business functions via a single, central data repository and common user interfaces.

A couple of “pro tips” in this area are to prioritize integration and scalability and to provide adequate training and support. Technology solutions should integrate seamlessly with existing systems and scale to accommodate future growth and changing business needs. Comprehensive training and ongoing support help employees more readily adopt and make fuller use of new technologies and automated processes.

10. Improve Customer Experience

Happy, satisfied customers tend to be repeat customers who spend more, thus constituting a retailer’s more profitable sales. Furthermore, their referrals are one of the most efficient forms of marketing. Improving customer experience requires delivering exceptional service, creating engaging in-store and online environments, and personalizing interactions to build strong, lasting relationships. Several ways to provide outstanding customer service include:

• Training staff to deliver knowledgeable, friendly, and personalized service that exceeds customer expectations.
• Creating visually appealing, well-organized, and easy-to-navigate store layouts and product displays.
• Implementing customer feedback channels, such as surveys, reviews, or social media monitoring, to gather insights, then addressing concerns promptly.
• Offering personalized product recommendations or promotions that are based on customer preferences and purchase history.
• Providing seamless omnichannel experiences, allowing customers to shop, purchase, and receive support whether they are at home on a desktop computer, using a mobile app, or in a physical store.

One key to executing this strategy and achieving better profit margins is to empower employees to deliver exceptional service. Give employees the necessary decision-making authority and equip them with the tools and resources they need to quickly resolve customer issues and deliver personalized experiences. And then be sure to gather and act on customer feedback.

11. Track Key Performance Indicators (KPIs)

Retailers can make data-driven decisions that optimize their strategies, identify areas for improvement, and allocate resources more effectively by regularly tracking and analyzing KPIs. This gives retail managers the information they need to take actions that reduce costs, improve efficiency, and drive revenue growth. Tracking KPIs involves identifying, calculating, and regularly monitoring the key metrics that provide targeted insights into the financial health, operational efficiency, and customer satisfaction of a retail business. This can include metrics such as gross profit margin, inventory turnover, customer acquisition cost, and net promoter score. To begin this process, consider the following actions:

• Identify the most relevant KPIs for the business, based on strategic objectives and industry benchmarks.
• Implement data collection and reporting systems to accurately measure and track those KPIs on a regular basis, such as monthly, weekly, or daily, depending on the business and the KPI.
• Set clear targets and goals for each KPI and communicate them to relevant teams and stakeholders.
• Conduct regular performance reviews and use KPI data to identify trends, gaps, and opportunities for improvement.
• Use KPI insights to inform decision-making, adjust strategies, and optimize resource allocation.

Encourage employees at all levels to embrace data-driven decision-making and provide training and support to help them understand and use KPI data effectively. Some impactful retail KPIs include sales per square foot (a measure of retail space productivity), average transaction value (the average amount spent per customer transaction), customer retention rate (the percentage of customers who continue to shop with a retailer over time), and sell-through rate (the percentage of inventory sold during a specific period).

12. Strengthen Supplier Relationships

Strong, collaborative partnerships with key suppliers foster mutual growth and can positively impact retail profit margins. Jointly planning and monitoring performance helps reduce supply chain costs and improves product quality and delivery. Collaborative partnerships can also lead to better pricing, exclusive product offerings, and opportunities for joint marketing initiatives that serve to drive sales. Supplier relationship management is an ongoing process. Here are some suggestions about how to get started:

• Establish clear communications channels with key suppliers, including regular meetings. Share information, discuss challenges, and identify opportunities for improvement.
• Develop joint business plans and forecasts to align supply with demand and optimize inventory management.
• Establish a scorecard of agreed-upon supplier performance metrics and monitor them regularly.
• Conduct regular supplier audits to ensure compliance with quality standards and regulatory requirements. This helps mitigate risks of costly rework, fines, and delays.
• Explore opportunities for joint product development, new offerings, or co-branding initiatives.
• Nurture a culture of trust, transparency and mutual benefit in supplier relationships, including timely payment of supplier invoices.

Encouraging two-way feedback from suppliers takes dedicated time and effort. To maximize the potential boost in profit margins, prioritize building strong relationships with strategic suppliers that have the greatest impact on the business. When choosing which suppliers to invest in, examine how their contributions ripple through your operations to influence product quality and customer satisfaction. Consider investing in specialized supplier relationship management software, which can streamline communications and performance tracking.

13. Implement Loss Prevention Measures

Inventory shrinkage, theft, and fraud cut into profit margins. Implementing loss prevention measures helps reduce this profit leakage, protecting a retailer’s bottom line. These measures include developing asset handling policies, providing employee training, implementing security systems, using data analytics, and establishing internal controls, like regular audits. Here, some specific tactics to minimize losses:

• Develop and communicate clear policies and procedures for handling cash, managing inventory, and preventing theft.
• Screen new employees, including performing background checks and verifying references, to minimize the risk of hiring individuals with a history of theft or fraudulent behavior.
• Implement advanced security systems, such as CCTV cameras, security tags, and access control systems.
• Use data analytics tools to identify patterns and anomalies that suggest possible instances of fraud or theft.
• Conduct regular inventory audits and reconciliations to identify and address discrepancies promptly.
• Provide comprehensive employee training on loss-prevention practices, including proper cash handling, inventory management, and reporting of suspicious activities.

It can be challenging for retailers to foster a culture of integrity and take a hard line with enforcement. However, it is essential to encourage honesty, accountability, and ethical behavior among employees to reduce the risk of internal theft and fraud. When such incidents are detected, it is necessary to collaborate with law enforcement agencies to report the incident, share information, and coordinate investigations.

Boost Your Retail Profit Margins With NetSuite

Retail business owners and managers looking to improve operational efficiency and drive growth to increase profit margins should consider NetSuite’s comprehensive ERP suite. NetSuite for Retail is a tailor-made management solution that integrates core retail business processes, including inventory management, order management, CRM, and omnichannel sales. And because it seamlessly integrates with NetSuite cloud accounting software, retailers can make data-driven decisions using reports that marry operational and financial information in real time.

Armed with this real-time visibility and leveraging NetSuite’s powerful analytics, retailers are better equipped to assess and improve their business’s profit margins. In addition to automating and streamlining financial processes, business leaders can more effectively monitor profitability, track critical KPIs, identify trends, and make informed decisions about pricing, promotions, and inventory management. In addition, the platform’s scalability and flexibility allow retailers to adapt quickly to changing market conditions and support their long-term growth objectives. And since NetSuite is cloud-based, everyone on the team, from staff on the sales floor to the warehouse and office management, has access to the same unified database so they can work together to boost profits.

The answer to the original question—“What is a good retail profit margin?”— is: It depends. There are many factors that influence retail profit margins, so what “good” means for any individual retailer must be analyzed in the context of that retailer’s unique business situation. Regardless, increasing margins is a common objective for most retailers. Doing so is a complex and ongoing process that requires a holistic approach, encompassing every aspect of the business, from inventory management and pricing strategies to customer experience and employee engagement. While there is no one-size-fits-all solution, implementing the strategies and best practices discussed in this article can help retailers optimize their operations, reduce costs, and drive sales growth—the three keys that unlock steady profit margin improvement.

Retail Profit Margin FAQs

What type of retail is most profitable?

A recent study from NYU’s Stern School of Business indicates that the retail subsector with the highest profit is retail building supplies, with an average net profit margin of 8.4%. This data was as of January 2024.

What is the average profit margin for retail?

The average gross profit margin for general retail is 30.9%, with a 4.4% corresponding operating profit margin and net profit margin of 3.1%, according to January 2024 data from NYU’s Stern School of Business. However, it’s important to note that profit margins vary significantly among different retail subsectors. Factors such as product category, target market, competition and operational efficiency all impact a retailer’s profitability.