Every year is the same. Even leap years are the same as other years. Each January is followed by a February. There is always a November before December. Tuesday arrives after Monday. There are always twelve months to a year and three months to a quarter. There are four seasons: winter, spring, summer and fall.
Since each year is the same it offers a retail business the opportunity to plan for ROI (Return on Investment). An effective policy to have is to never have the same merchandise in stock a year later. This means, using a shoe store as an example, that if you invested in forty shoes of one brand, none of those forty shoes should be in stock 366 days later.
To further illustrate the point, let’s say that the forty shoes are manufactured by Rox and the style number is 22N7A. There are various sizes for adult females and males. A Purchase Order with number 79563 was issued for the investment.
If you sell all forty shoes in a month, that is great. This does not mean you should not invest in forty more shoes of the same brand and style. This means that the forty shoes you received with Purchase Order 79563 should not still be around a year later. If you still got a pair or more of these shoes, then you are losing money.
An effective ROI strategy is to follow this Stock Rotation Philosophy and this is how it works. You purchase forty shoes from a vendor.
Your cost is $40 and you use your general pricing formula to determine the retail price. Let’s say retail is $99.99. You put your shoes on display and they are slow sellers. Two months down the road you sell have 35 pairs left.
So you mark the shoes down and put them on sale for $79.99. You make some sales and a profit. Six months later you still have about 30 pairs left. So you mark the price down again and begin selling the shoes for $59.99. The profit margin has decreased but you are still making a profit. You find that the shoes sell quickly and all 30 are sold within a month.
If you sell all forty shoes at $99.99 you will make a $2400 profit. However, let’s say that at $99.99 the product does not move quickly. You end up having these shoes in stock for four years. So it takes four years to make the $2400 profit.
However, if you find you can lower the price, the shoes sell quickly but after selling all forty at the price of $59.99 you have only made $800 profit. Lets say you sold all forty pairs in a month, and then invested in another forty pairs. Each month you sell all forty pairs and each month you invest in another forty pairs. By the end of the year you have earned $9600 in profit.
By sticking to the $99.99 price, just because there is more profit per item, you only sell ten shoes by the end of the year. Your total profit is $600.
$9600 is a lot better than $600. That is the beauty of the Stock Rotation Philosophy. Many people, especially business people understand this principle and if reading this article, will respond with a”duh!” However, it is surprising even to me, how many people fail to understand this basic ROI concept.
About the Author
Lawrence Roth
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