A profit analysis by product and activity shows exactly where money is being made. It’s almost always our most reliable indicator of opportunity. Smart retail strategy is then simple: Do more of what’s profitable and less of what’s not.
The results of profit analysis are often so unexpected as to provoke disbelief. The losses generated by some products and activities defy all our business intuition; meanwhile previously underappreciated products and activities carry the company.
Sometimes the analysis suggests retail strategies contrary to what we might have preferred. The most profitable opportunities are rarely the easiest or the most personally attractive. Those are easy and attractive to everyone, and competition keeps profits low.
The true opportunities are those that offer us high, dependable, and defensible returns on our effort and investment. To recognize them, we have to do the numbers.
We wouldn’t get in our cars and pull out of our driveways without knowing where we’re going. Yet we sometimes work for years and gamble our company’s equity and survival without knowing where we’re going and how we’ll get there.
“Just keep doing what we’re doing” might be a reasonable plan if we’ve just come off a successful year, the market isn’t changing, competitors aren’t catching up, and we’ve got plenty of equity to continue the trend. But that’s not a description of retailing.
We have too much at risk to trust luck. We need realistic projections of where we're going, a retail strategy to get there, and contingency plans for coping with the potential challenges along the way.
Business people are, by definition, busy. There are always more projects and ideas than time to execute them.
Most of us have trouble sitting still for deep and detailed thought. “Ready, fire, aim” better suits our personalities, and it works well for decisions with quick feedback and relatively small consequences.
But gut feel is rarely a smart shortcut in choosing strategic directions—it often leads to long and expensive detours and digressions. We can waste months or years of effort and expense learning what we might have thought out in hours or days.
Thinking takes time, but not thinking takes much more.
We have an irresistible tendency to presume our profits are proportionate to our sales and activity. Consequently we feel the more sales and activity we’re involved in the more profitable we’ll be.
In truth some things we do make large profits while the many others make only losses. (If there is a business somewhere that makes a net profit on every product and activity, it’s surely the result of exceptional analysis and discriminating selection and not happy accident.)
Increasing profits is often easy. We just need to analyze our products, activities, segments, and customers and choose carefully.
More sales mean more space, more employees, more inventory, more expenses, and more headaches—but not necessarily more profit.
Profit isn’t a fixed percentage of each sale—its range is wide and includes more red numbers than black. The trick is to add sales that contribute profits and avoid sales that add only losses.
Growth is neither good nor bad retail strategy. Profitable growth is good; unprofitable growth is bad.
Youthful enthusiasm sometimes tempts us into markets and products on the fringes of our specialties. Opportunities for adding profitable business often look simple and ripe for the taking.
Occasionally the opportunities are worthwhile, but seldom are they as simple as they appear. And all are unavoidably distractions from our ongoing business.
We should remember that it’s not whether we can do it, but whether we can do it best. Unless we’re the customer’s first choice, we don’t get the sale. Small differences between first and second place competitors make huge differences in their profits.
Are we really so much smarter than our competitors that we can, with partial focus, beat them at what they focus on full-time?
Any gathering of retailers includes lots of commiseration. Topics usually include manufacturers who give better prices to larger competitors, stores and Internet companies that don’t have to collect sales taxes, retailers who sell for less by avoiding the expenses of showrooms and support, etc. If such injustices could be remedied, we reason, the contest would be fair and we could compete with anyone.
But equal isn’t really what we need. When all else is equal, price is the only criterion and no one makes a profit.
What we need are differences—differences in products, knowledge, relationships, specialized services, convenience, terms, marketing, image, and any other criteria we can devise or create.
Pruning is trimming the less useful to redirect energy and growth to the more desirable.
In retail, our time, effort, and capital are limited. When we choose to do one thing, it’s necessarily at the expense of another.
Smart retail strategy means regularly reviewing not just whether the things you're doing are profitable, but whether they’re the best opportunities available for your limited resources.
Entrepreneurs who risk everything and win big become business legends. Articles and books describe them as heroes and geniuses.
Not much is written about entrepreneurs who gamble big and lose. They’re plentiful—far more common than the winners—but their stories don’t interest us. When their stories are written, it’s usually how an errant and obsessive risk-taker followed a flawed and dangerous plan, created chaos, lost fortunes, ruined lives, and landed in jail. (Losses attract investigation and a good investigator can always find a law broken. Meanwhile the system is amazingly forgiving when everyone is happy with their profits.)
Everything we do in retail involves risk—opening the door for business each day is a gamble that the day’s receipts will exceed its expenses. We can’t build a store, hire an employee, place an order, or run an ad without taking a risk.
But these are calculated risks with affordable outcomes—rarely do they have catastrophic potential. When we spread our risks among multiple gambles with favorable odds and minimized potential for catastrophe, the law of probabilities keeps us out of trouble.
Gambling everything on every roll of the dice, regardless of the odds, isn't wise retail strategy—it guarantees disaster sooner or later.
Success is not a good teacher. Failure provides more useful lessons.
When success comes easily, we tend to underestimate future challenges and risks. We mistake good fortune for intelligence and invincibility; we forget that our time is limited and luck occasionally turns against us.
Periodic failures keep us realistic and help us appreciate our victories.
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