Showing posts with label Basics. Show all posts

Friday, June 8, 2012

Conversion Rate

Basically speaking, conversion rate is a measure of how well you can turn your people who are “Just looking” into customers. In a convenience store, the conversion rate is close to 100%. Most people who enter a convenience store or discount retailer have at least one purchase in mind when they come through the door. For these stores, conversion isn’t the goal. The idea there is to increase sales through the sale of “Impulse Items”.

There are many ways of turning a “Just Looking” browser into a customer. One of the best and most effective ways is by providing the information they need to make a decision. In many cases those who are just looking are really planning to buy sometime; maybe not today, but sometime in the future. However, if the business can provide that customer with an incentive to purchase now rather than in the future then, oftentimes, the browser will become a customer.

One of the best ways to prepare for a customer is to have ample product knowledge. If you can provide the customer with all the information he needs to make a decision, you have made his job easier. And, as an added bonus, once he makes the purchase he is less likely to experience buyer’s remorse if he has ample product knowledge before he makes the purchase.

When a browser says, “This is too expensive” he may really be saying, “Tell me how to make it more affordable.” He might also be saying “Are you out of your cotton-pickin’ mind?”

In small ticket retail the best way to convert a customer is through proper merchandising. Provide an attractive display that isn’t crowded with a lot of other things that make a distraction. Place complementary items close by and try to take advantage of cross promotion.

McDonalds learned a long time ago that one of the best ways to get people to purchase something in addition to the item they have chosen is to suggest. “Would you like fries with that?” If someone is purchasing a snack, offer them a cold drink. If you are selling a car, you would offer them an extended service plan. If someone is purchasing a coat, suggest a hat. The list is endless.

When working behind the counter at a convenience store, I experimented with suggested sales. I found that by suggesting the purchase of lottery tickets that sales increased. However, I found that suggesting a specific lottery ticket increased the conversion rate substantially. “There are five more big prizes left on Break the Bank. You can buy one for only $2.” Sometimes people would get all the way home and then come back to buy that ticket.

Can you think of a time when a suggestion encouraged you to make a purchase?

Disclaimer
The opinions or advice listed in this blog or website should be used as a place to start only. It is not a substitute for the use of a professional.
Please be sure to consult your attorney and/or accountant with any specific questions.
There is no one right answer to any business question that will cover all circumstances. Please Visit McClendon Enterprises

Wednesday, June 6, 2012

Foot Traffic Happy Birthday

Happy fiftieth birthday David

Foot Traffic

If you are in retail one of your biggest concerns is getting feet in the door. We call that foot traffic. If you have a restaurant or have a movie theater or night club, you call it getting butts in the seats. The concept is the same even though the name is different. A rose by any other name still has a bee in it that will sting you.

Many stores try to increase their foot traffic a multitude of ways. Wal-Mart has the “Everyday Low Prices” idea which, in theory, works better than most other methods. Some stores will use sales and promotions. Some stores will have contests and give-aways. But the best method of getting feet in the door is word of mouth.

If, once a person comes in your store you treat them well, they will probably be back. If, however, you ignore them or, worse yet, are out and out rude to them, chances are good they will never cross your threshold again. It is important to serve every customer well every time.

In order to improve foot traffic the store must decide what it can do better than most other stores. Once they have decided that, they can use that as a niche to get people in the door. One local convenience store brags on their restrooms. Customers stopping there can be sure they will find a clean restroom. Their prices are higher than most other stores, but they have the cleanest restrooms around. Families that need to stop for a drink and chips will probably stop there and pay a few dollars more so they can use a clean restroom.

Whether your store offers the cleanest restrooms, the freshest coffee, the tastiest snacks, the coldest drinks, the widest selection of snacks or whatever, you need to use this as your selling point. Get the feet in through the door and then turn that visitor into a customer.

Can you think of some great ideas to get customers to walk through your doors? Share them with the old redneck in the comments.

Friday, June 1, 2012

Inventory Control

Let’s Go Sledding

When we first opened the Western Auto Store we were a little naive about the term “Order Multiple”. I am sure they covered all of this at Western Auto school but, when it came to details, my father kind of zoned out.

Basically, small retailers are forced to order in multiples. Often times this is one case. So, if you want to order one quart of Havoline oil you have to order a complete case of 24.

One of our customers asked my father to order a sled for him to send to his grand-youngens up north. My father looked in the catalog and saw that we offered two kinds of sleds. The man said he wasn’t sure what kind he wanted, that he would know if he saw it in person. My father figured that he could always sell one sled. How hard could that be?

The two sleds sold for $19.99 and $39.99 each. My father ordered one of each. The problem was that the $19.99 sleds had an order multiple of 12 sleds and the $39.99 model had an order multiple of 3 sleds. So, when the order arrived we had 15 sleds. Grandpappy took one of the $39.99 sleds and we put the rest of them out on display.

Years went by and we marked the sleds down to practically nothing. Still no one wanted the sleds. Back then stores had a platform that ran along the tops of their regular shelves where items could be displayed. We moved those sleds up to the platform and tried to keep the darn things dusted. Every year we paid inventory tax on them and every year they sat. We ordered them in 1974.

In 1986 we began remodeling the store and we moved the sleds to the backroom. There they sat. Finally, in mid-January 1987 it started snowing. The store normally opened at 8 AM but, at 7 AM I was sitting at the Waffle King eating breakfast and saw the snow start falling.

The sleds came to my mind. Maybe we could sell one or even two of the things. I went to the store and got them out of the backroom. They still had the original price tags on them. I dusted them off and started to look up what they cost us so I could mark them at cost and get rid of them.

People started coming in and I sold sleds. I sold them all at the original stickered price. By the time my father arrived at a few minutes to 8 AM we were sold out. He went to the back to look for the sleds and could not find them. He asked me if I knew where they were and I told him I had sold them all. When I told him I sold them all at full price he was surprised and pleased.

Even selling them at full price we lost money. Every year the sled sat unsold we had to pay inventory tax on them. Every year they sat, our money was tied up in them. Money we could have used to purchase other items that would turn a lot faster than once every 13 years.

Business is all about the little details. Knowing about order multiples is an important detail.

Do you have a story about buying an item to sell that simply sat on the shelf for years? Post a comment and tell us about it.

Thursday, May 31, 2012

Inventory Turns

In the past I spoke to you about inventory turns. Like I mentioned then, it is important that you sell through your merchandise fairly often. How often you need to turn through your inventory to be profitable is pretty much industry specific. There is no one set rule of thumb for this.

In a small store, like a convenience store you really want to sell through your inventory at least once per month. Some businesses can get by with fewer turns than that. The big thing here is to study your industry and determine what seems to be the industry standard. If that information isn’t available, then your best bet is to simply do your best to turn your inventory as rapidly as possible.

To calculate how often you are turning your merchandise you use the following formula:

Inventory Turns = Sales/Average Inventory

To determine average inventory you can take your inventory at the end of one fiscal year and add it to the inventory at the end of the next fiscal year and divide by two. If your company takes an inventory each month, then simply add up the inventory amounts for each month and divide it by the number of months you have figures for.

If your inventory on December 31, 2010 was $100,000 and on December 31, 2011 was $150,000, you simply add the two together and divide by two.

=$100,000 + $150,000

=$250,000

=$125,000

In this example the average inventory is $125,000.

Let’s say that sales for the year are $750,000. To get our number of turns for the year, we simply divide our sales by our average inventory.

Inventory Turns =Sales/Average Inventory

= $750,000/$125,000

This means that we are turning our inventory six times per year. This figure does not mean that you are selling everything completely out six times per year. You will still have to look to see what items are not moving as fast as this. You may wish to mark the slow moving items down and discontinue them. You may want to add more variety of your faster moving items to make even more sales. Calculating inventory turns is a tool. Use it wisely.

Can you think of a time when you had that one terrible item that just would not sell? For us at the Western Auto in Iva it was a doughnut maker. We bought it as part of the opening inventory and finally, ten years later, we gave it away. No one wanted that doughnut maker.

Tuesday, May 29, 2012

Profit

Profit =Sales- Expenses

Profit equals sales minus expenses seems easy enough to understand. However, sometimes it is easy to overlook some of the details. For one thing most people believe that your profit is what you make above and beyond what you paid for an item. For instance if a store sells a candy bar for $100 but only paid 75¢ it would be easy to believe that the profit on that candy bar is 25¢.

Actually the 25¢ is the Gross Margin on the candy bar. This will be discussed in a later post.

Actually that is true up to a point. However, in a retail environment every item for sale has to pay its rent. Each month a retail store has to pay a rent or mortgage payment, electric bill, water bill, phone bill, internet access bill, payroll, insurance, maintenance etc. Every product that store sells has to contribute its share to paying those expenses.

If an item sits on a shelf and does not sell, it does not pay its rent. The longer the item sits on a shelf the more rent it has to pay when it is sold. So, if our candy bar sits on the shelf for two months then when it finally sells it has to pay its share of two months-worth of expenses. All the rest is profit.

Thursday, May 24, 2012

Stock Price

There is a very sad situation in business. Stockholders elect the board of directors for a company. The board of directors hires and fires management. Management must make sound financial decisions for a company. Often times what is a very sound financial decision for a company adversely affects the stock price.

Often managers’ decisions are effected even further by the potential of a change in stock price because they own shares or stock options in the company. These shares and options become more valuable as stock prices go up.

The problem is that stock prices don’t reflect reality. Stock prices reflect stock purchasers “Perception” of reality. Enron would be a good example of perception versus reality. Enron traded above $90 back in September of 2000.It dropped to as low as 7¢ a share before it completely disappeared. In reality, because of all the “Funny Money” and shenanigans that went on at Enron it was never really anywhere near as valuable as the stock price would indicate.

A company is only really as valuable as its basics. How valuable is its management team? How much debt is the company carrying on its books? How much cash does it have? What kind of revenues does the company have? What type of return does the company have on its investment?

I like to compare the valuation of companies to oil wells. When you start out you have a piece of land that may or may not have oil under it. Geologists and other experts can come in with sophisticated instruments and make all sorts of reports after performing countless tests but the bottom line after all it is that there may, or may not, be oil.

The drilling company seeks out people to invest in the oil well. They contact friends, relatives, and people who are known to invest in this type of endeavor. Those who invest, or choose not to, base their valuation on the well, not on the well itself but on their perceived value of the well. They base these perceptions primarily on the team of people who believe that there is a good shot at finding oil at this particular well. In other words, they place a value on the management team and not on the well.

As the well is being drilled hopeful signs may emerge. The drill bit might strike mud that gives clues about the oil content. This would raise or lower the perceived value of the well. In the end there is no real value on the well until oil is actually struck. Once the oil is struck estimates may be made about how much oil is in the well. Still this value is based upon assumptions and not reality.

What do you think is most important in determining the value of a company, the stock price or the long-term potential?

This is not meant as investment advice. If you are looking to invest you should consult an investment expert.

Wednesday, May 23, 2012

Book Review: The Art of the Start

Book Review The Art of the Start

The Art of the Start is a very well written, thought provoking book. I read it from cover to cover. I like the idea that many references to other sources are included. This book takes a look from the financing side of a business venture. I recommend that every potential business owner read it as part of their business education.

My version of The Art of the Start was bundled in with Business Plan Pro 15th Anniversary Edition which is a helpful tool to use when you start to write your business plan. If you are seriously considering starting a business and/or writing a business plan this book is one you should read before you begin.

Book Review Policy

My policy on book reviews is to give you my honest opinion of the book. From time to time publishers will give me a copy of their book for free for the purpose of me reading the book and writing a review. The publishers understand when they give me the book that I am under no obligation to write a positive review.

If you will look at all my reviews, you will see that there have been occasions when I have written a negative review after having been given a book.

I often provide links to books on Amazon.com where you can purchase books and help support the continued operation of this blog. However, I strongly encourage you to check out your local library. Many libraries now offer electronic borrowing for free.

I am disclosing this in accordance with the Federal Trade Commission's 16 CFR, Part 255

I received this book as part of my M.B.A. degree from Florida Institute of Technology. It was packaged with the software for Business Plan Pro.

Tuesday, May 22, 2012

Cash Flow

In any business, “Cash is King.” This means that no matter how profitable the business is on paper, if you don’t have a proper cash flow, or adequate cash reserves, you are out of business.

Cash flow is exactly what it sounds like, the amount of money that flows through your business. In most small businesses the cash flow is more like white water rapids as it goes out and a mild trickle as it comes in.

The trick in managing cash flow is to speed up receipts, or money coming in, while slowing down payments going out. If you can work with your suppliers to get terms of 30, 60, 90 days or longer, you can, in effect, use that supplier’s money to finance part of your operations. However, sooner or later you have to pay the fiddler if you want to dance. The money has to be repaid and generally there is an added cost for holding on to the money longer. Sometimes you will give up a discount if you pay past a certain point in time. Other times you will have to pay a finance charge on the money.

Either way you must decide if the cost of the money is something you can afford. In many cases you can’t afford to pay it but you can’t afford not to pay it at the same time.

The biggest thing here is to manage your cash flow and pay your bills whenever makes the most economic sense in your situation.

Remember, paying late can and will affect your business credit rating and, depending on your circumstance, may also affect your personal credit rating.

Disclaimer
The opinions or advice listed in this blog or website should be used as a place to start only. It is not a substitute for the use of a professional.
Please be sure to consult your attorney and/or accountant with any specific questions.
There is no one right answer to any business question that will cover all circumstances. Please Visit McClendon Enterprises

Monday, May 21, 2012

Return on Assets/ Return on Investment

Return on Assets or ROA is a way to measure how productive the assets of the company are. Basically put it is a measure, expressed in a percentage to show whether or not the company’s assets are being used profitably.

Return on Assets (ROA) and Return on Investment (ROI) are basically one and the same. To calculate ROA we take the Net Income and divide it by the Total Assets

= Net Income / Total Assets

Expressed as a percentage

Generally we determine this on an annual basis but any specific time period will do. So, monthly would be a way to calculate ROA but, again, generally speaking this is done on a yearly basis.

If Billy-Bob has a total investment of $1,000 in his still (including all corn mash in inventory, all jugs in inventory and his pickup) then that is our figure for total assets.

If Billy-Bob sells $100 worth of shine after expenses are accounted for then we divide the figures.

= $100 /1000

10% Return on Assets

In business we often use terms like ROA and ROI instead of saying Return on Assets etc. I think this is so that we appear to be smarter than we actually are. It is often intimidating for someone to talk to you in jargon that you don’t understand. I learned a long time ago to speak up and say, “could you please put that in stupid terms for us stupider people?” If the person stops and explains it then, you have learned what they were talking about. If the person belittles you for asking the question then, you have learned that they are a jerk and probably don’t know much more than a few terms. In this case, take your business elsewhere.

Tell us about a time when someone tried to intimidate you with jargon.

Wednesday, May 16, 2012

My First Computer Experience

One of the things Suzanne and I did while we were in Kansas City was to buy a Point of Sale computer system for the Western Auto Store. I had practically no experience with computers so this was a very time consuming process.

Back then there was an extremely long turnaround time for a computer system through the Western Auto MIS Department so I had time to get things ready. The first step was to get the store set to “Model Stock”. To do this I had to go to each item in the store and make sure it had a price label with the correct stock number on it. I also had to make sure that we told the computer exactly how many of each item we wanted to keep on hand. This was very time consuming. I had to go through the store with a micro fiche, typewriter (for typing bin tags) and price marker all mounted on a converted shopping cart.

We also had to have a second phone line installed at the store. This was so that the computer could communicate with the Western Auto computer. I also used this line as my private line for Suzanne to call whenever I was working before the store opened. That way I would not have to answer the phone when we weren’t open.

I got the system set up and running. We weren’t quite ready to go live yet. Shortly the screen on the main terminal displayed the message “Error 1005 Ignore, Reboot, Retry.” I called Western Auto MIS. They said, “It isn’t our error message. It must be a hardware issue.” So, they conference called in Texas Instruments. Texas Instruments said, “This isn’t our error message.” So they added MicroSoft to the conference call. Microsoft asked, “What size is your hard drive?” I answered “40 Megabytes.” The surprised response from Microsoft was “Forty Megabytes, you will never fill that up!” I was then told that the error code was not Microsoft’s either. I told them that I had that code and that someone needed to fix my problem. It was decided I would reformat my very first hard drive. So, I had to install floppy disk after floppy disk on this massive 40 megabyte hard drive. Today you can burp and fill up forty megabytes.

Thursday, May 10, 2012

Turns

The life and death of a company is determined by its turns. Turns is how many times in a given period a company sells through its stock.

Billy-Bob keeps four 14 inch white-wall, Mud Gripper tires in stock. Each month he sells twelve of these. This means he turns his stock three times each month. The higher the number of turns, the greater the profit.

As long as Billy-Bob is never out of stock when a customer wants this particular tire it would appear that he has a pretty good handle on his turns. If he were to increase his inventory to thirty tires, then he would not be turning his stock each month and is paying too much in inventory. There is a fine art to turns but with today’s modern software programs it is easier to keep up with this than in days of old.

I have worked with a group of people who seem to love to buy baseball caps to sell. If a salesman comes along with a load of caps to sell, they will buy them if they get a good price. Then, the caps sit and gather dust for months. Eventually, years later, the caps will almost be sold out and along comes another salesman and the whole thing starts over. They don’t seem to understand that they are losing money on this.

Wednesday, May 9, 2012

M.B.W.A.

M. B. W. A.

In Search of Excellence introduces us to the term Management by Wandering Around or Management by Walking About. Both terms mean the same thing.

The bottom line of M. B. W. A. is that the best way for a manager of a company to find out what is going on and keep some sense of control over the company is to get out on the factory floor. For retail it is important that everyone, all management, spend a significant amount of their time on the sales floor.

Probably two of the greatest merchants of all times are J. C. Penny and Sam Walton. Both of these men were practitioners of M. B. W. A.

Sam Walton is said to have gotten upset if he found his people spending too much time at company headquarters. He is legend for showing up at the loading docks of his distribution centers with doughnuts so he could spend time with his drivers. He felt that the drivers were in and out of many different stores and that they would have a good feel about what stores were doing well and which ones weren’t.

The idea behind M. B. W. A. isn’t to catch people at anything. The idea is so that the one making the decisions has some idea about what is going on.

You can spot companies that don’t use M. B. W. A. a mile away. It seems that many of the big petroleum companies have gotten out of the business of running the retail fueling stations and/or convenience stores. They did this because they could not make the kinds of profit the thought they should make on the stores. So, naturally a company that can’t make something work is in the prime position to tell others how to make it work.

Almost all of the big petroleum companies have somehow determined that the key factors to making a profits are that each location must have at least two Multi-Product Dispensers (MPDs). An MPD is that machine that most people call pumps at a gas station. An MPD will have a hose on either side of it and can fuel two vehicles at a time.

Well somewhere along the line some MBAs got together and said, “A station can’t be a station unless it has two of these things. If you travel much along the less traveled roads in America you will wander upon stations that have had to manage to squeeze two of these things onto small lots. Many times the two MPDs will be so close together that only one of the MPDs can be used at a time. When this happens the second MPD is basically a waste of money since it serves no useful purpose.

Had these MBAs asked the Old Redneck MBA he could have told them that two is not always the ideal number. Had they done a little M. B. W. A. they would have figured it out for themselves.

Another thing these geniuses decided was that we are all too stupid to know what kind of station we are in unless the clerk behind the counter is wearing a shirt with the fuel company’s logo. “Excuse me sir, I could not tell from that huge company sign outside what kind of station I am in. Could you please put on a shirt to tell me?”

When was the last time you walked out of a convenience store and said to yourself, or anyone else for that matter, “I ain’t buying this company’s gas anymore. Billy-Bob behind the counter did not have on a shirt with his name and the name of the petroleum company.” If the company gave these shirts to the stations, that would be one thing. But the company sells them to the stations at an astronomical price which makes it harder for the station to make a profit. The same profit that the petroleum companies could not make in the first place.

If the petroleum companies did a little M. B. W. A. they would see that their policies are wrong.

A company should require that everyone in management spend time on the front lines. If it is a retail store the CEO should spend one week each month on the sales floor and in the back room of a store that is a good distance away from the company headquarters. I am not talking about like the show Undercover Boss, which seems to be staged anyway. I am talking about getting down in the trenches and working side by side with the employees and actually learning.

Have you ever had any experience with M. B. W.A. ? Comment and tell us about it.

Wednesday, May 2, 2012

Pareto Principle

You’ve heard it time and time again, “70 percent of your sales come from 30% of your customers.” Or if you are in retail you will hear that “80 percent of your sales come from 20% of your inventory.” Whereas this may be true one must realize that 90% of all statistics are made up on the spot.

In redneck terms, don’t trust what someone tells you, do the math yourself. If you have a store and you want to determine what percentage a particular item has of your sales you take the total sales revenues of the item and divide it by your total sales.

Example:

If you sold $50 worth of moon pies today and your total sales were $300 then you would have

Sales of Moon pies ÷ Total Sales

So, in this case $50 ÷ $300 = 16.67%

The whole thing was named after an Italian economist named Vilfredo Pareto. It seems that a business management consultant named Joseph M. Juran came up with the concept and named it after Pareto.

So, how does this apply to you? Peter Drucker is often credited with having said, “What gets measured gets done.” That being said, it is important to measure how well your products are performing or how well your efforts are paying off. Ideally everything you have to sell is pulling its own weight. As I said in earlier posts, each product has to pay its rent. A business should from time to time review and see what products are bringing in the highest percentage of profit. That way a concentrated effort can be made to improve the placement of those products. At the same time the business needs to know what products aren’t doing so well. Those products need to be reviewed. If a change can be made to improve the sales of those products then by all means change them. But, if no improvement can be made the product must be removed from the product mix. This makes room for more of the better selling products and, hopefully, frees up some of the money tied up in unsellable inventory.

Dreamstime