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David Geller

David Geller: Magic Act

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Identifying your store’s key metrics, and working to raise them, is your ticket to success, says David Geller.

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[h3]Magic Act[/h3]

[dropcap cap=E]very store is made up of a lot of numbers. Cost, markups, salaries, numbers of sales, inventory levels. It gets confusing and many a store owner doesn’t know what to look at.[/dropcap]

But some numbers are more important than others. In fact, some are so important that we call them “magic numbers” — and by tracking them, and working to improve them, your business will automatically improve. Today, let’s chat about the three numbers you can track to improve your sales numbers:

[h4][b]Magic 1: Closing Ratio[/b][/h4]

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Closing ratio is how many people out of 10 purchase something. To get it, simply track the number of customers a salesperson talks to and then how many of those people actually bought something. I’d suggest dividing tracking into two or three groups. In my store, I tracked three: 

1. Product sales 
2. Repair sales 
3. Custom design sales

On the third one, you might combine custom design with repairs and call it “shop sales”. Or, if your store doesn’t have any custom design sales at all, you’d track only two types: Product Sales and Repair Sales.

Let’s say Mary waits on 10 people who are looking at product and she sells two. That’s a closing ratio of 20 percent. So look at the number. You might have a half-million dollars invested in inventory, and still have eight people walk out without buying a thing. Depressing.

Just think what would happen to product sales if you could get Mary to sell just one more person out of the 10. Do you realize that the third customer would mean a 50 percent increase in product sales without any additional advertising dollars?

If Mary sold $200,000 in a year with a closing ratio of 20 percent, going up to 30 percent would give Mary sales of more than $300,000.

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For the three categories we’re measuring, here’s some rough averages that I’ve found to be the closing ratios for most independent retailers: product sales — three out of 10; repair sales — nine out of 10; and custom design — eight out of 10.

[h4][b]Magic 2: Average Sale[/b][/h4]

To determine average sale, I’d again separate my calculations into the three groups, as repairs will lower average product sales. Calculation is easy: divide total product sales by the number of products sold. You want to look at two averages for sure, maybe three:

1. Average product sale 
2. Average repair sale 
3. Average custom design sale.
Keep track of these numbers monthly. It’s one of your key gauges of how well you are selling and serving your customers’ needs. But remember, your average sale could be capped by your location. I know one North Carolina jeweler who had a $75 average sale in his store on the “South Side” of town. Then he moved across town — now his average sale is over $500.

Average sales from what I’ve seen and read in trade journals: product sales —under $400; repair sales — $17 – $28 (mine was $65); custom design — $750 (mine was 50 percent higher).

A few years ago, we heard a surprising report — that the average sale at Tiffany & Co was a mere $250. You know what that means? A lot of silver jewelry sold in blue boxes.

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[h4][b]Magic 3: Walk-In Traffic[/b][/h4]

To start monitoring walk-in traffic, go to Radio Shack and get a simple door counter. Or go to Harry Friedman’s site at www.freidmangroup.com, which has one with calculators, closing ratios … the whole shebang. Tracking how many people walk through the door will help you determine if one advertising method does as well as another you used last time.

Combined with closing ratio and average sale, you now have three numbers which will without fail indicate how well your store is doing.

A wise man once told me: “If you have a closing ratio of only 30 percent, why advertise to bring in seven more people who won’t buy? Instead, train the people you have to close better and you’ll save advertising dollars.”

As store owner/manager, your job is to:

1. Find the store’s numbers as of today. 
2. Compare individuals’ personal numbers and compare them against store averages (we don’t recommend comparing these numbers directly against those of other associates) 
3. Increase the individual numbers — and the store’s averages will increase automatically along with it.

Can you imagine what would happen if you had a closing ratio of 30 percent with an average sale of $200 and you went to a closing ratio of 45 percent with an average sale of $300? (P.S. To keep you from staying up tonight, if a salesperson had an average sale of $200, closing ratio of 30 percent with yearly sales of $250,000 and did this increase it would mean a whopping sales spike of $249,800.)

David Geller is an author and consultant to jewelry-store owners on store management and profitability. E-mail him at dgeller@bellsouth.net.

[span class=note]This story is from the February 2004 edition of INSTORE[/span]

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David Geller

Here’s What’s Really Keeping You From Having More Money

If you think it’s low margins, you’re wrong.

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I WAS READING THE Big Survey in last month’s issue of INSTORE, and one question popped out at me: “What will be your greatest priority next year?”

Thirty one percent of respondents said, “Boosting profitability.” The money-savvy ones (21 percent) said, “Clearing old inventory.” Most jewelers just don’t get that there is a big difference between making money and having money.

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Someone once taught you that margin was your most important metric. Yep, that was a good thing when everyone made two and three times key, but no more. What hampers you from having money is not low margins as much as inventory level.

Your debt typically equals one-half to three-quarters of your inventory that’s more than a year old. It shows up as accounts payable, credit card debt, lines of credit, and money owed to you (the owner) for money you’ve personally loaned the company.

Having money depends on your ability to keep that debt to a minimum. How can you do that? As a jewelry store/shop owner, there are a few options.

  1. Repairs. This is a revenue stream that requires very few resources to produce income. Your ongoing costs are findings, small stones and your jeweler’s paycheck (plus the occasional equipment upgrade).
  2. Buying scrap. This really only requires several thousand dollars of cash on hand to make a profit. Buy it on Monday, mail it on Wednesday, get a check on Saturday and you’ve made a profit and replenished your cash to do it again.
  3. Inventory sales. This is likely your biggest cash outlay, and it needs to throw off revenue monthly. All of it must throw off revenue at least once a year. All of it. You can’t wait two and three years to have money come in to pay a bill or check tomorrow.

Look at 1 and 2 above. The amount of money required is small. You don’t keep scrap very long and most people order “just enough” in findings for jobs this month, maybe a few extra items.

But inventory piles up for years and causes debt. In a jewelry store, your average inventory level should be somewhere between your cost of goods sold and gross profit amounts for a 12-month period. Any amount above that will show up as debt and poor cash flow.

Keeping inventory within these two numbers (give or take) will increase positive happy cash flow, increase your checking account balance, lower total overall debt, remove stale and outdated inventory, and may actually increase sales as you have more leverage to buy new fashionable jewelry that pleases your customers.

That would be a good thing, right?

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David Geller

Can You Make Money at 12 Percent Margin? Yes, But Here’s What It Takes

As one factor decreases, another must increase.

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CAN YOU MAKE a living on a profit margin of just 12 percent? Did the word no come to mind? You’re wrong.

For coin or bullion dealers, 8-12 percent gross profit margin is the norm, and they make a lot of money with little debt.

The “magic triangle” includes profit margin, inventory turn and inventory level. The combination of all three tells your future in a store, how much money will be left over to pay all bills and have money in the bank.

Let’s take a simple store math example for a year using keystone. A typical jewelry store would have a net profit of 5 percent. Here’s how a P&L would look:

Total Product Sales: $500,000
Cost of Goods: -$250,000
Gross Profit: $250,000
Expenses (45%): -$225,000
Net Profit (5%): $25,000

Are you making money? Absolutely. Do you have any money left over after paying expenses? Depends.

Imagine if last year, you sold everything at Christmas, not a stitch of inventory left. January 2nd, you fly to New York with three suitcases and buy the $250,000 of inventory that the cost of sales above pays for. You’ll have no debt. If something sells within six months, you have the money to reorder the replacement for the case, thus always having a stocked showcase.

Divide $250,000 in cost of goods by inventory of $250,000 and you get one turn a year.

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Now assume the same figures above, but instead of three suitcases costing $250,000, you bring five suitcases and bring back $600,000 of inventory for the store. Same sales and profit numbers as before. Did you make a profit, make money? Yessiree Bob! Do you have money? No! You bought $100,000 more inventory than the sales you took in. So how do you pay for it?

  • Owe vendors way past the due date
  • Put it on credit cards
  • Go to bank and take out a line of credit
  • Personally skip paychecks
  • Take money from your personal checking accounts

In this scenario, your inventory is $350,000 higher than the cost of goods sold. Divide cost of goods by inventory level, and it shows you have a 0.41 turn. A turn of 0.41 means this store has more inventory than needed for two years.

So, what’s the secret to having money?

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The long and short of it is, if you’ll keep your inventory levels approximately equal to the gross profit dollars you’ll make over a year, you’ll both make money and have money.

The lower the profit margin, keep inventory lower, or if you must have a higher inventory level at lower margins, then turn it faster. Instead of taking 12 months to sell it, sell within nine.

It takes all three for The Magic Triangle to work magic in your store!

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David Geller

What You Can Learn About Turn from Clothing and Furniture Stores

Hint: Turn more, earn more.

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THERE ARE REALLY only three important numbers in a retail store: gross profit dollars, inventory on hand, and inventory turn. So who’s better at managing money among these three retailers?

Store                         Gross Profit %
Jewelry                      42.6%
Furniture                  45.0%
Clothing                    46.5%

Darn close, aren’t they? The grass isn’t so green on the other side after all. Or is it?

Let’s look at inventory turn, which means how many times a year an item sells. (These numbers are from stores doing “pretty well.”)

Store                            Turn            Days in the Store
Jewelry                   1.4                       260
Furniture               3.5                       104
Clothing                 4.3                       84

A clothing store won’t keep a shirt/suit/jacket/blouse in the store more than three to four months. They will heavily discount it at that point to get it out the door; they don’t just “squash” merchandise closer together to show more like jewelers do.

Furniture stores work the same way. They have a natural problem: available floor space. The biggest reason for high turn in a furniture store was told to me by a furniture store owner: “Where am I going to store an extra 100 mattresses?”

Clothing stores get rid of their merchandise every quarter. Furniture stores get rid of their inventory every four months, and a good jeweler turns their merchandise a little over once a year. But most jewelers I meet have had their total merchandise for two-and-a-half to four years! This causes terrible cash flow and piles of debt.

If you buy jewelry in January, it should sell at least once by Christmas; that would be a turn of 1.0. If it stays until after Christmas, discount it or give a spiff to the sales staff to unload it, or even return it to your vendor and exchange it.

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If it is still there in 18 months, scrap it. That’s what clothing and furniture stores do.

Let me show you the money-making power of turn. All three stores are going to buy an item for $200. For a jeweler, this might be earrings; for a clothing store, a nice jacket; and for a furniture store, it might be a chair. In the table below you can see the cost, profit margin in dollars, and what that brings in for total product dollars in a year.

Keeping an item long-term is a detriment. Even if someone buys it three years from now, you should have had that $207 in profit for each of the three years, totaling $621 brought into the store (not the measly $163.35 you would make by holding it three years).

When it’s over a year old, most things need to be disposed of and replaced. Maybe your customers just aren’t buying what you have in stock. Change that!

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