Turnaround Speed Vs. Margin

After reading parts 1 and 2, you're now aware that product lifecycle and product shelf-life are major factors to be aware of. Since then you've eliminated suppliers with inadequate margins in relation to your realistic turnover value. 

Now it's time to be even smarter. Salesmen will offer you all kinds of bulk deals - and of course pre-order discounts are definitely attractive, even on items that have a longer, more sensible product cycle.

But now you're worried about if that stock will fly out of the door fast enough right? You're rightly concerned with a situation where you have to discount and dilute margin to get your cash back into circulation. And you should be ...

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This is where you have to pick suppliers that hold stock and do not exclusively force you to order in bulk in advance to gain a better margin - a situation that only favors them.

If your supplier is agile and capable of replenishing stock quickly, it can be better to make more regular, say monthly, orders to keep yourself liquid. This is particularly crucial for startups to 'test the water' and then, in time, know with more confidence and market knowledge what will move and what will not.

However, beware, even experienced retailers are caught out every year with slow-moving material that saps regular buying resources from their cashflow.

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EXAMPLE

You decide to offer customers the new 2016 Widget X (€100 Public Price) from Brand Z. You aim to sell one per month of a 6-month sales season before it's winter and Brand Z release the 2017 model or Brand Y release their own attractive version.

The weather is poor and you only have demand to sell 3 at full price, giving a turnover revenue of €300. Here's how that adds up for two different scenarios below:

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Pre-Order Terms

• Order 6 WidgetXs costing €50 each on pre-order at 50% margin with free shipping = €300 cost and €300 of potential margin for total potential turnover of €600 - assuming all are sold for full price.
• You only achieve sales of €300 (as above) and have 3 left in stock to either hold or discount to further dilute the 50% margin you gained by buying in bulk.
• Total gain that financial year €0.  Effective margin 0%
• You have 3 left in stock and €150 to recover in cash, assuming you can even sell the rest at half price this or the next season.
• If you sell a 4th at half price this financial year you then make €50 profit with an effective margin of 14% - but still have 2 left to shift. Even if you sell the other 2 at half price this financial year you'll only achieve total €150 profit and an effective margin of 33%. (Plus your customers are in the habit of now waiting for you to go 'on-sale' each season … which will impact sales earlier in the year next summer.)

From-Stock Terms

• Order at rate of 1 Widget X per month (during 6-month sales season) for €60 at lesser 40% margin 'from-stock' price terms with €10 shipping cost per unit, costing €70 each. 
• You sell 3, giving revenue of €300 and profit of €90.  Effective margin 30%. No stock left to clear. All of your cash back in circulation.
• You order a 4th, but demand dries up and you decide not to order any more. You sell the 4th for half price to sweeten a rig pack deal, giving a total revenue of €350 and eventual profit of €70. Effective margin 20%.
• You have no further Widget X's in stock to worry about and your cash is free. You have not gone 'on-sale' and set a pattern.

Whether you pre-order or not, having suppliers with good stock levels is useful because, even if you get it right and have a great season of strong sales on high-margin pre-order stock, if they can replenish you fast to meet extra demand you have further optimized sales and margin to the max - plus satisfied your own customers fully!