What Is the Average Gross Profit Margin for a Small Retail Business?
Gross profit margin and net profit margin are two factors linked to a small retail business’s success. In basic terms, gross profit margin is the profit margin existing before removing taxes and operating costs. Net profit margin is the profit margin left over once the taxes and operating costs come out of the business.
There is no average gross profit margin for a small retail business, since every retail business is unique. To show the range of gross profit margins, consider that a retail grocery store operates with a gross profit margin of around 25 percent, while a small jewelry store can operate at a gross profit margin level of around 50 percent.
To calculate the gross profit margin for a small retail business, add a percentage of markup to the wholesale cost of an item or service. This provides a selling price. The difference between the selling price and the wholesale cost provides the gross margin price. To determine the gross margin percentage, simply divide the gross margin price by the selling price. For example, if a ceiling fan has a wholesale cost of $55 and a markup of 40 percent, the selling price of the ceiling fan is $77. This gives a gross margin price of $22. When dividing the gross margin price by the selling price, the gross margin is about 29 percent.
Although there is no average gross profit margin for a small retail business, many small businesses operate within the parameters of having between a gross profit margin of 25 percent and 35 percent. It is important to remember that when operating expenses rise, it becomes necessary to increase the gross profit margin. Failing to do so puts a business at a loss. In 2005, independent booksellers had gross profit margins of slightly over 41 percent, yet had operating expenses of slightly over 42 percent, thereby causing many booksellers to operate at a loss.
When factoring in the gross profit margin, businesses always keep in mind the net profit margin. After all, the net profit margin is where profit for a business comes in, as well as money for future investments. If a business tries to get too high a gross profit margin, however, the pricing of an item or service might become too high, leading to a reduction in sales. On the other hand, trying for too low a gross profit margin might lead to a reduction in net profits, leading to less money for business investments, as can be seen with the small independent booksellers who were operating at a loss.
To raise the net profit margin without making pricing too high in the gross profit margin, a business needs to reduce costs, either by reducing the price of goods or by reducing the cost of labor. This means that it costs less to produce or purchase an item, but by keeping the price constant despite the lower cost, the overall gross profit margin increases. Gross profit margins need to stay steady, and if they wind up dropping, adjustments must be made to keep the business profitable.
Small retail businesses sometimes operate at a disadvantage, since they cannot reduce the cost of goods or services the same way a large corporation can. For example, someone operating a small retail clothing store usually cannot get a clothing wholesaler to offer the same pricing the store offers a large department store, since the department store chain buys in bulk quantities. This means small retail businesses need to exercise vigilance over costs at all times, to ensure they do not operate at a loss.
Richard Morgan is an experienced screenwriter, eBook author and screenwriting instructor. He started writing professionally in 1990 when his script for “Miss Mafiosa” was purchased by producer Michael Z. Gordon. His writings have appeared in “Alfred Hitchcock Mystery Magazine,” “Writer’s Digest,” “Creative Screenwriting,” “Dog Fancy” and “Business Week.” Morgan studied journalism at the State University of New York, Stony Brook.