Determining Sales Potential
In a retail business, your sales potential depends on location. Like a tree, a store has to draw nourishment from the area around it. To work through the problem of selecting a profitable location, answer the following questions. In what part of the city or town will you locate? In the downtown business section? In the area right next to the downtown business section? In a residential section? On the highway outside of town? In the suburbs? In a suburban shopping center? Some of this decision depends on how close you need to be to your customer base.
On a worksheet, write where you plan to locate and give the reasons why you chose that particular location.
Now consider these questions that will help you narrow down a site in your location area. (The local chamber of commerce or EDC may have census data for your area. Census Tracts on Population, published by the U.S. Census Bureau, may be useful. Other sources on marketing statistics are trade associations and directories.) What is the competition in the area you have picked? How many of the stores look prosperous? How many look as though they are barely getting by? How many similar stores went out of business in this area last year? Which store or stores in the area will be your biggest competitors?
Again, write down the reasons for your opinions. Also write out an analysis of the area's economic base and give the reasons for your opinion. Is the area in which you plan to locate supported by a strong economic base? For example, are nearby industries working full time? Only part time? Did any industries go out of business or move from the area in the past several months? Are new industries scheduled to open in the next several months?
When you find a building that seems to be what you need, answer the following questions. Is the neighbor-hood becoming run down? Is the neighborhood new and growing? Are any super highways or throughways planned for the neighborhood? Is street traffic fairly heavy all day? Do pedestrians look like prospective customers? How close is the building to bus lines and other transportation and is that important to your customers? Are there adequate parking spaces convenient to your store? Are sidewalks in good repair (you may have to repair them)? Is the street lighting good? Is your store on the sunny side of the street? What is the occupancy history of this building? Does it have a reputation for failures? (Have stores opened and closed after a short time?) Why have other businesses failed in this location? What is the physical condition of the store? What services does the landlord provide? What are the terms of the lease? How much rent must you pay each month? Estimate the gross annual sales you expect in this location.
When you think you have solved the site location question, ask your banker to recommend people who know most about locations in your line of business. Contact these people and listen to their opinions, weigh what they say and then make your final decision.
When you have a location in mind, you should work through another aspect of marketing. How will you attract customers to your store? How will you pull business away from your competition? Many small retailers find competitive advantages within this aspect of marketing. The ideas they develop are as good as and often better than those the large companies develop. The following areas are designed to help you think about image, pricing, customer service policies and advertising.
Every store has an image. For example, throw some merchandise onto shelves and onto display tables in a dirty, dimly lit store and you've got an image. Shoppers think of it as a dirty, junky store and avoid coming into it. The same merchandise displayed on brightly lit, well-organized shelves could project a "high-tech" image.
Your image should be focused enough to promote in your advertising and other promotional activities. For example, "home cooked food" might be the image of a small restaurant.
What is the image you want shoppers and customers to have of your store?
Value received is the key to pricing.
"Value received" by a customer includes not just the product but also service, attitude, friendliness, product knowledge, warranty, etc. It's a whole "bundle of value". Consider what you can provide your customers in addition to the product that will cause them to buy from you, not a competitor. The larger the perceived value, the more the customer will pay. This helps you avoid strictly playing the low price game. What you do about the prices you charge also depends on the lines of merchandise you buy and sell. Pricing also depends on what your competition charges for these lines of merchandise. Your answers to the following questions should help you to decide what to do about pricing. In what price ranges are your lines of merchandise sold? High, medium, low?
What services will you offer to justify your prices if they are higher than your competitor's prices?
Will you sell for cash only? If you use credit card systems, what will they cost you? Will you have to add a surcharge to the original price in order to absorb the cost?
Customer Service Policies
The services you provide your customers may be free to them, but you pay for them. For example, if you provide free parking, you pay for your own parking lot or share the cost of a lot with other retailers.
List the services your competitors offer and estimate the cost of each service. How many of these services will you have to provide just to be competitive? Are there other services that would attract customers that competitors are not offering? If so, estimate the cost of such services. Now list all the services you plan to offer and the estimated costs. Total this expense and figure out how you can include those added costs in your prices without pricing your merchandise out of the market.
Who is your customer? Describe your typical customer.
Age Male, female, both Number in family Annual family income Location Buying patterns Reason to buy from you Other Geographically describe your trading area (i.e., county, state, national).
Economically describe your trading area (single family, average earnings, number of children).
Consider advertising last, after you have determined your image, price range and customer services. Only then are you ready to tell prospective customers why they should shop in your store.
When advertising dollars are limited, it is vital that your advertising be on target. Before you can consider how much money you can afford for advertising, take time to determine your advertising goals. What are the strong points of your store? What makes your store different from your competitors? What facts about your store and its merchandise should you tell prospective customers?
When you have answered these questions, you are ready to think about the form and potential cost of your advertising. Ask the local media (newspapers, radio and television and direct mail printers) for information about the services and results they offer.
How you spend advertising money is your decision, but don't fall into the trap that snares many retailers who have little or no experience with advertising copy and media selection. Seek professional advice on what kind and how much advertising your store needs.
In-Store Sales Promotion
To complete your work on marketing, think about what you want to happen after prospective customers come into your store. Your goal is to move stock off your shelves at a profit and to satisfy your customers. You want repeat customers and money in your cash register.
At this point, if you have decided to sell for cash only, take a second look at your decision. Don't overlook the fact that Americans like to buy on credit. Often a credit card, or other system of credit and collections, is needed to attract and hold customers. Customers will have more buying confidence and be more comfortable in your store if they know they can afford to buy. Credit makes this possible.
To encourage people to buy, self-service stores rely on layout, attractive displays, signs and clearly marked prices on items offered for sale. Other stores combine these techniques with personal selling. List the display counters, racks, special equipment (something peculiar to your business like a frozen food display bin or a machine to measure and cut cloth) and other fixtures. Figure the cost of all fixtures and equipment by listing them on a worksheet as follows:
Type of equipment: number x unit cost = cost Draw several layouts of your store and attach the layout that suits you to the cost worksheet. Determine how many signs you may need for a twelve-month operation and estimate that cost also.
If your store is a combination of self-service and personal selling, how many salespersons and cashiers will you need? Estimate your personnel costs as follows:
I will need_______salespersons at $_______each per week for a total of $______ per year. (Add approximately 11% to cover payroll taxes, unemployment insurance and workers comp). Personal attention to customers is one competitive tool for a small store. When training employees, emphasize that everyone has to pitch in and get the job done. Customers are not interested in job descriptions, they are interested in being served promptly and courteously. Nothing is more frustrating to a customer than being ignored by an employee. Decide what training you will give your salespeople in how to greet customers, show merchandise, suggest other items and handle customer needs and complaints.
When buying merchandise for resale, you need to answer these questions: Who sells the line to retailers? Is it sold by the manufacturer directly or through wholesalers and distributors? What delivery service can you get and what shipping charges must you pay? What are the terms of buying? Can you get credit? How quickly can the vendor deliver reorders? Can you get discounts for buying larger quantities?
You should establish a source of supply on acceptable terms for each line of merchandise and estimate a plan for purchasing as follows:
Delivery time How many days or weeks does it take the supplier to deliver the merchandise to your store?
Freight costs Who pays, you or the suppliers? Freight or transportation costs are a big expense item.
Reorder policy What is the supplier's policy on reorders? Do you have to buy a gross, a dozen or will the supplier ship only two or three items? How long does it take for delivery to your store?
Often shoppers leave without buying because the store did not have the items they wanted. Stock control, combined with suppliers whose policies on reorders are favorable to you, provides a way to reduce "walkouts."
The system you use to keep informed about your stock, or inventory, depends on your line of merchandise and the delivery dates provided by your suppliers.
An owner-manager who buys reasonably well can expect to turn over stock several times a year. For example, the stock in a small camera shop should turn over four to four-and-a-half times a year. What is the average stock turnover per year of your line of merchandise? (Your SBDC counselor can help you find the answer) How many times do you expect your stock to turn over? List the reasons for your estimate.
The purpose of controlling stock is to provide maximum service to your customers. Your aim should be to achieve a high turnover rate on your inventory. The fewer dollars you tie up in stock, the better. In a small store, stock control helps the owner-manager offer a balanced assortment and determine stock to be ordered on the basis of what is on hand, what is on order and what has been sold.
Beware of "minimum order quantities" set by suppliers. Buying a supplier mandated two dozens items when you really only sell five per year will results in spending cash on items not needed for quite some time. Over time, these "inventory creepers" will severely damage your cash flow.
When setting inventory controls, keep in mind that in addition to the cost of the stock, there are also the costs of purchasing, receiving and storing stock and the cost of keeping stock control records.
Your stock control system should enable you to determine what needs to be ordered on the basis of what is on hand, what is on order and what has been sold. Some trade associations and suppliers provide systems to members and customers. Otherwise your accountant can set up a system that is best for your business. Inventory control is based on either a perpetual or a periodic method of accounting involving cost considerations as well as stock control.
When you have chosen the system you will use to control stock, estimate its cost. You may not need an extensive (and expensive) control system if you do not need the detailed information such a system collects. The system must justify its cost or you will waste money and time on a useless effort.
Many stores (e.g., bookstores, shoe stores and clothing stores) use computerized software systems to control inventory. A computerized inventory system is especially helpful if you must maintain a large variety of products, as in a bookstore, a liquor store or a shoe store. A computerized system allows you to avoid overstocking items that do not sell in large quantities by providing detailed reports on sales and stock turnover. Speak to your accountant about the feasibility and cost of using a computerized inventory system or visit your local computer store to see what inventory systems are available. The best system usually will be one designed for your line of business.
In a retail store, behind-the-scenes work consists of receiving merchandise, preparing it for display, maintaining display counters and shelves and keeping the store clean and attractive to customers. The following list will help you decide what to do and the cost of those actions.
First, list the equipment (for example, a marking machine for pricing, shelves, a cash register) you will need for your behind-the-scenes work. Next list the supplies you will need for a year, e.g., brooms, price tags and business forms.
Use this format to figure these costs:
Name of equipment/supplies: quantity x unit cost = cost Who will do the back room work and the cleaning that are needed to make a smooth operation in the store? If you do it yourself, how many hours a week will it take? Will you do these chores after closing? If you use employees, what will they cost? On a worksheet describe how you plan to handle these tasks. For example:
Back room work will be done by one employee during the slack sales times of the day. I estimate the employee will spend____hours per week on these tasks at a cost of $ _____ (number of hours times hourly wage) per week and $__________per year.
I will need_____quare feet of space for the back room operation. This space will cost $______ per square foot or a total of $________per month. List and analyze all expense items, such as utilities, office help, insurance, telephone, postage, accountant, payroll taxes, employee benefits and licenses or other local taxes, the same way. If you plan to hire others to help you manage, analyze these salaries also.
Last Updated: June 2005