Inventory Profit Decay

Depreciation, aged stock, profit decay, margin erosion; this concept can take a number of different forms, but they all mean the same thing. The goal of purchasing product is to sell it at a profit, but that product doesn't exist in a vacuum, it is subject to outside forces that reduce the amount of profit potential the moment it hits your store.

Say you bought a bicycle from one of your suppliers at a 30% margin in the spring. You end up selling it in August at MSRP. Did you make the total 30% profit margin on it? Well, sort of, and no.

There are a variety of factors that start to erode the margin of that bike the moment it hits the floor. The core erosion catalyst is time. The best way to make a complete and uneroded profit on that item is to sell it the moment it hits your floor. Come to think of it, the only way to make sure there is no erosion of margin would be to sell it before you purchase it.

The more time you hold onto that product, the more other forces start to act on it.

Operating Costs: each day you have the shop open is more time where you are spending money to run the business, fixed costs like rent/utilities and variable costs like payroll start to eat away at your potential profit.
Opportunity Costs: For particularly poor performing product, you may have other stock around it that moves more profitably, meaning that the floor space taken up by your aged product could have been used for the product that turns more.
Discounting Costs: Once the aged stock has been on your floor for long enough, you may consider it a bad wager and want to unload it to recuperate some of your money, so now not only has it cost you profit in all of the above, but it has also costs you in what you are willing to take for it.

Inventory Profit Decay Tool

The tool below is a powerful bit of math that is sure to make your day either a lot better, or a lot worse. The inputs are relatively simple. First, go find a product you've had on your floor for a while, tell the tool what you paid for it, what the MSRP is, and how long you've had it. Then tell input what your daily cost of doing business is. Broad stroke is fine here, rent, payroll, insurance, utilities, etc. Then, put in your total cost of goods on hand. Lastly, you can tell the tool whether you have that item on discount or not, and how much the discount is.

Once this is done, the calculator will give you an idea of what that product actually cost you, whether you made a margin or not, etc. Deep breaths.

*The tool below features embedded pages that may be challenging to view from a small screen

Okay, so what now?

Just like this product doesn't exist in a vacuum, neither does the realization that it isn't as profitable as you needed it to be. This is where a phase shift needs to occur.

Running these sort of resistance checks against your inventory is a crucial part of a healthy and profitable purchasing strategy.

Most bike shops make course corrections on a yearly basis, if at all. This tool will have likely shown you that the profitable lifespan of your products is measured in weeks, months, and quarters, rather than years. Addressing these issues in lockstep with the expected lifecycle of your profit will eventually reduce the purchasing of poorly performing product, and allow you to maintain a steady flow of strong profit-based purchasing for your business from here on out.