Dollar Bills
Sell the Best! Leave the rest!
Written by
Biff Ulm
Subject:
Inventory

Retail isn't for the faint of heart. Even the smallest retail boutiques require thousands upon thousands of dollars worth of inventory to best serve their customers. When one looks at inventory on the shelf, you should look at each item as stacks and stacks of dollars. This will overwhelm most non-entrepreneurial types. For the business minded person, stacks of dollars equally represents potential income and profits.

If you read any number of business books, the 80/20 rule repeatedly rears its head. At the university level, it is called the Pareto Principle. Pareto was an Italian Economist that discovered the 80/20 rule to explain how in late 1800's Italy 80% of the countries wealth was controlled by 20% of the population.

The 80/20 rule occurs naturally across so many areas in business and has statistical evidence to continually prove it. For most businesses, where they apply Pareto's findings most frequently is with customers. For most retailers, 20% of their customers will represent 80% of their sales. Creating communications, rewards, etc. for these key relationships is so important. They are the fundamental to finding your ideal customer and the people you should be serving to the best of your ability.

While learning to serve customers better is always a worthy conversation. we are going to take a more focused approach on inventory. How can we apply the 80/20 rule to maximize customer's wants and keep our inventory dollars nimble.

One of the biggest moves I ever made for my business was investing in a point of sale system and the appropriate training to use it. I would be lying if I said inputting all of our merchandise into the system was easy at first. It wasn't! It took three months to really get everything fully functional. At the time, I seriously questioned if it was worth it. I almost threw my computer out onto the street a couple of times during that time. In the end, it was worth its weight in gold. My inventory data is my most important asset inside our store.

The first and perhaps biggest benefit with any inventory tracking system is the numbers keep you honest as a buyer. Let's have an open conversation. Most good buyers I know have a creative instinct for searching out the unique, best new trend. No numbers can replace the human side of the equation nor should they completely. Finding unique items requires risk and gut level decisions. Numbers aren't great in these situations.

Yet, our emotional side can trick us, especially after those intuition based decisions are made. I know it does to me. We have personal attachments to what we sell. Those personal attachments can undermine our buying behavior. Have you ever over bought something because you liked it? I know I have. Let's also be frank. The numbers we are going to talk about don't replace the hard work of searching out products your customers want. It simply adds an extra arrow to your quiver - a really big arrow that can explode on impact.

A few months after installing our point of sale almost a decade ago, I immediately started seeing interesting patterns. As someone who now wholesales and partners with lots of retail specialty stores, these patterns show up like clockwork in other store's numbers, as well. Here are the solid gold nuggets thanks to Mr Pareto.

  • Looking at all the lines you carry, twenty percent of your vendors will create eighty percent of your sales.
  • Digging deeper inside each product line, twenty percent of the items you sell from anyone one company will most likely represent eighty percent of their total sales.

Now, there are ways to break this rule if you are or companies you are working with understand this principle and are constantly cutting and curating their lines. That is the goal! You want a larger percentage of your items turning. How do we do this? We do this by applying a principle I have coined - Buy the Best! Leave the Rest!

The concept is simple. The practice is harder and requires consistent discipline. It is ok to slip occasionally. Here is how we apply it.

  1. Leverage the top 20%. Find the items that are giving you 80% of your profit. If you have never tracked your inventory sales before, I guarantee it will be a percentage around 20% or lower. These are the products you will re-order consistently and keep in stock with deeper inventory if needed. If you runout of these items, it means your sales numbers will fall. These are also items that get dedicated floor space and larger displays.
  2. What about the other 80%? Try everything in your power to move these items up the ladder, but never re-order them unless they have proven sales.
  3. More thoughts about the 80%..... These items will most likely sell without ever having to put them on sale, just not nearly as fast as the items above. In retail, it is about selling. Those are the only items we re-order.

    Display is a HUGE factor in a products success. So don't throw out the baby with the bath water yet. My staff has found simply moving an item or making a new display can take a poor seller and make it a superstar product. So, your first step is move those items and redisplay. We want to see if you can make it a superstar. If after three moves and two to three months in the store without stellar success, it is time to move on.
  4. Keep trying to find new best sellers. The one thing that is consistent about business is it is always changing. You need to place equal emphasis in trying to find new product that will be your next big seller. Transition your budget from re-ordering so-so product lines (the 80%) and bring in new. Not all will be top sellers, but none will be if you don't try. What is a top seller today will most likely not be three years from now. Start developing new top selling products.

WARNING! There are three of them!

First, if you recall above, there are companies that will be outliers if they practice the 80/20 rule well. They aren't common, but when you find them keep them, love them, work with them because their products are usually customer favorites and rock the cash register!  What you will see is while the 80/20 rule will still apply, all their products sell better than even most of your other lines. Here is were you order width in a line even if it isn't in the top 20. This is because even their 50% items will make you more money than most other companies number one.

Who doesn't like artists, businesses and companies that are constantly evolving. A few companies in my retail store that break the 80/20 rule are Hydroflask, Birkenstock and BlueQ. All their products sell, and they are constantly coming out with new. As a wholesaler myself, I try to do the same. I focus insane amounts of energy to create and only offer designs that are relevant to my customers. I only wholesale items I that are consistently the best or the best. If they aren't you won't see them because your success is ultimately mine. I have no problem cutting a previous best seller if it's number become flat.

*** It is beyond this conversation, but learning to use turn ratios and other trend data helps identify these and other outliers as your sell the best leave the rest skill set and data sources develop. ***

Second, watch for hidden gems. When training new buyers, I often see them cut low preforming lines without looking what is and isn't selling inside their offerings. Let me give you a real world example. In our kitchen section, I had one of my assistant buyers approach me and say we needed to cut a company. I agreed that their overall performance was a dismal. We had done a number of things to help spark sales including moving the display, featuring items in our window, training staff about their unique offering, but as a whole the line was flat. Yet, when I opened up the detailed sales report they had one item that was selling off the charts. We continued ordering and actually featuring that one item. We sold 150 units within months of that discovery

Third, it will take time to accomplish the above if you aren't currently using some sort of sales/inventory tracking system. But, it is never too late to start. Don't give up on it. One needs a full season of numbers to start getting valuable info. It takes a minimum of one year to have the depth of data needed to become a dangerous force. As time passes, the information at your fingertips becomes richer and more valuable. Again, don't give up! Your efforts will pay dividends.

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MEET BIFF
(Yes, that is his real name! His parents were hippies, and well.... Here he is.)
Biff is the founder of MN NICE ENOUGH. He is the least hirable person on the planet. After signing his first business loan at the age of 16 for $4,000, he has only worked for one company in his 44 years on our happy blue sphere. He accredits his success to unapologetic differentiation and embracing one's genuine, quirky self.
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