Margins- Percentages and Dollars; Where to Focus?

I always looked first at gross margin percentages when I was running a business. Before revenue, before anything. Because those percentages were what determined how many dollars I had to pay all the salaries and operating expenses. Higher had to be better. It just had to be.

Except that I was never dealing with major price differences in nearly identical products when I did my analysis. And I think maybe that changes the calculation for skate hard goods. Let’s see.
One Shop’s Numbers
I called a shop. It’s not just a skate shop- it does snow too. I talked to one of the guys who runs it and he gave me some rough numbers off the top of his head (You know who you are- thanks!).
They sell two to three hundred branded decks a year. They charge $50 to $55 for each one (more than some shops I think) with grip tape. Those decks each cost them a bit north of $30 each, he estimated. Let’s say $32.00.
They also sell around 500 blanks a year. Those sell for $30.00 each with grip tape, and cost them around $16.00.
If they sell branded decks for $53.00 each, and sell 250 of them, then their annual revenue from those decks, according to my antique but trusty Hewlett Packard HP22 financial calculator is $13,250. Their gross margin percentage is 40. Their total margin dollars earned on each branded deck is $21. The total margin dollars earned after they sell all 250 is $5,250.00. The total cost is $8,000.
Now let’s take a look at those 500 blank decks in the same way.
The first uncomfortable but unavoidable fact, of course, is that the shop is selling twice the number of blank decks as branded.   Two-thirds of this shop’s skate deck buyers think that a branded deck is not worth $23.00 more than a blank. Or they think it’s worth it, but can’t afford it.
Companies who are cutting their prices on branded product better hope it’s the later, and they better hope their brands are “cool” and they better hope they can earn at least the same number of margin dollars to afford the programs that keep or make a brand cool.
I’ll leave it to all your arbiters of coolness and fashion to figure out which brands are cool. Hell, I buy most of my jeans at Costco. I’m so uncool I’m even willing to admit it.
But I digress. That’s too kind a term, actually. I’m wandering around in the wilderness here, and better get back to the 500 blank decks the shop is selling.
So anyway, they’re selling these 500 blank decks at $30.00 a pop and getting revenue of $15,000 annually. That’s more than from the branded decks. The gross margin percentage is 47 percent. Total gross margin dollars earned is $7,000. Total cost of these inventory decks is $8,000- the same as for the branded decks.
I swear to god that I didn’t figure out these percentages and stuff in advance to make a point. I did it as I wrote it, unclear what I was going to come up with and what it would suggest. Much as I hate struggling to create a table, I think this is worth while one. I’ll leave it to the poor layout people at TransWorld to make it legible.
Number Sold
Selling Price
Total Revenue
Total Cost
Gross Margin Percentage
Total Margin Dollars
A Little Analysis
There are a couple of caveats to this. First, I didn’t specifically include the grip tape. As both branded and blanks include it, I don’t think it changes the analysis. Second, different stores have different costs, selling prices, and mixes of branded and blank decks. Change those things and you obviously are looking at different results. Which means, as will be clear when I discuss the implications of this below, that every shop should be using this table to take a look at their own numbers. Not just for decks, but for every product where there is a non-branded alternative.
At the risk of inflicting a blinding glimpse of the obvious on you, I’m going to point out some things that the table already makes very clear.
The total investment for the shop over a year of $8,000 is the same for both branded and blank decks. I’m pretty confident that having to handle twice as many blank as opposed to branded decks doesn’t increase the cost of selling the product. If you invest $8,000 in branded decks, you earn $5,250 in gross margin dollars. Invest the same $8,000 in blanks and you earn $7,000. From a strict financial point of view, which would you rather do? Which is the best use of your $8,000?
If it didn’t affect how their customer viewed the shop, if they didn’t recognize that what the brands do is critical to the popularity and growth of skating, if branded product wasn’t important in getting customers into the shop and if those customers didn’t buy stuff besides skate decks, then this shop would rather sell blanks than branded decks. The return on investment is just better. Thirty three percent better.
Those are a lot of ifs. Important ifs. In spite of what the raw, maybe oversimplified numbers show, there is no way, not even in a strictly financial sense, that shops can not be committed to carrying branded product. Without it, they just aren’t skate shops.
But that doesn’t mean you can ignore this analysis.
What’s To Do?
For this shop, at least, these are not big revenue numbers. But each shop has to do this analysis and, as I said above, not just for decks. There is no retailer out there who does not want to sell more of whatever makes them more money. At least, I hope there isn’t and if there is, they won’t be around long.
Financial considerations never exist in a vacuum. After you do this analysis for your shop you have to ask:
  • Does the customer who buys a blank buy as much other stuff as often as the customer who buys the branded deck?
  • Does the customer buying the blank replace their deck more often and, therefore come in the store more often?
If the answer to those two questions is clearly “no,” then what the retailer wants to do becomes quite clear. Looking at decks in isolation, you may earn more selling blanks compared to branded decks overall. But you earn more margin dollars selling each branded deck than on each blank ($22 compared to $14 in this case). And the customer who buys the branded deck spends more money on other stuff and comes at least as often as the customer who buys the blank if, in fact, the answer to these questions is no. You certainly don’t get rid of blanks, but under these circumstances you recognize the value, in a broader sense, of the customer who is committed to a brand or brands.
What is that value? I don’t know! Figure it out. Ask your sales people. Look at your sales journals and see what went out the door with the branded, as opposed to the blank deck. Surely your point of sale system allows you to track customers by phone number or something. This is an important thing to quantify. It is a strategic issue especially if you are concerned that hard goods prices may move down. 
If the answer to those two questions looks like it might be “yes,” then the role of branded product changes. You don’t have to try and carry as many graphics from as many brands as you can plaster the walls with. It’s not that you don’t want to carry and sell branded decks, but some part of that space may be better used to sell other products.
The shop referenced in this article sells twice the number of blank as branded decks. So the return on investment calculations, focusing on just the decks in isolation, favors the blanks. In a shop where the numbers were more equal, that would change. The gross margin percentage on the blanks would still be higher, but the total margin dollars earned would favor the branded product.
So what we have here is a situation where gross margin dollars may be more important than gross margin percentage.  I thought we might get to this point.  But then again, depending on product volume and customer buying behavior, it might not be.
Do the little table above for your shop wherever you have a branded and a blank product. Figure out the typical buying behavior for customers of branded versus blank product. You will make some better decisions that will make your shop more money.