INDUSTRY INSIGHT VOLUME OR MARGIN?


Andy Campbell, independent business development consultant, specialising in the gardening and DIY sectors, provides some advice on whether retail businesses should go for volume or for margin.


I


s it better to go for volume or for margin? When this question is asked, more often than not the person is


thinking percentage margin. The answer every time is a resounding, “Which ever generates the greatest cash profit.” The reason for this apparently obtuse answer is that the question is indicative of an over-simplified approach to managing profitability. There is no single, simple answer to the question that can lead to a maximisation of cash profit. Some businesses believe that driving sales volumes is the key to driving profit growth, whereas others follow diligently an approach that is based on maximising the percentage margin. However, our customers tend to pay us in pounds not percentages,


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we pay our suppliers in pounds not percentages and generally speaking we get paid or pay ourselves in pounds not percentages. Therefore, whilst percentage margins on individual lines can be a useful guide to cost price and retail price decisions; if followed too slavishly they can result in under-performance in terms of profitability. It is how much cash profit that is made on each unit of sale and the collective sales for that product that is fundamental.


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“There are exceptional circumstances when volume might be pursued at the expense of percentage margin.”


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Price/volume relationship Underlying this whole issue is the fact there is a price/volume relationship in existence for all products. As the price for a line changes so will the volume. For highly price sensitive lines the volume is likely to change by a lot when only a small change in the price is made. The converse being true, that for products where the sensitivity to price change is


low, which from previous experience tend to constitute the majority in any category, the volume decreases or increases minimally with a significant change in the price up or down.


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The conclusion from this is that for most products, retail prices can be towards the upper end of the spectrum with only a small number of highly price sensitive lines needing to be highly competitive. The secret therefore is to model the different price/volume combinations using previous experience and commercial


judgement to arrive at the optimum mix that generates the maximum cash profit. There are exceptional circumstances when volume might be pursued at the expense of percentage margin and to the detriment of cash margin, such as to drive footfall or to offer a competitive response, but this can’t be on all lines for all of the time otherwise you will seriously under-perform the potential for your business. It is recognised that modelling all the options for a wide range of products in today’s fast-moving marketplace is unrealistic. But if only the high profile, key volume lines are concentrated on to begin with, a real difference to the bottom line can be achieved.


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Andy Campbell is an independent business development consultant, specialising in the gardening and DIY sectors at both the retail and production ends of the supply chain. If you’d like to get in touch with Andy, please call 01225 864331, e-mail: andy@ andycampbellconsulting.co.uk or visit his website at: www. andycampbellconsulting.co.uk


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by FEBRUARY 2021 DIY WEEK 25


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