The profit margin puzzle in furniture: A complete guide
High profit margins are a telltale sign of a booming business. But are they a good enough metric for success in the furniture space? This article explores the concept of furniture profit margins, strategies to improve them, and compares it to other business success metrics
- The average gross profit margin for a retail furniture business is over 40%
- Overheads, markup, and shipping costs affect profit margins
- Brands can use innovative strategies to improve their profit margins
What are furniture profit margins?
Furniture profit margins are the net gains made from furniture sales after factoring in the total expenses. They are calculated in two ways: gross profit margins and net profit margins.
1. Gross profit margins
Gross profit margins show a company’s ability to generate profit from its core operations. They are easy to determine and are often used to compare the success of two furniture businesses. They are calculated as follows.
Gross profit margin = (gross profit ÷ revenue) x 100
Here, gross profit = revenue earned – the cost of furniture sold.
2. Net profit margins
Net profit margins are calculated to understand the success of a furniture business.
Net profit margin = (net profit ÷ revenue) x 100
Where net profit = revenue earned – the cost of furniture sold – operating expenses – interest – taxes.
Net profit margins show a lot of variation in the furniture space. This is because the net revenue, sales, and operation costs differ between businesses. Also, the interest and taxes vary.
All that said, net profit margins give insights into the stability of a furniture business. Additionally, they also point to how the earnings are spent.
3 factors influencing net profit margins
1. Overhead costs
Running a successful furniture business involves more than just putting products out on display and waiting for a sale. Today, retailers must ensure that their customer experiences are also enjoyable to improve conversions. This gives rise to overhead expenses.
Some furniture retailers spend large sums of money on decor, lighting, and entertainment. Others spend a fortune on in-store staff to ensure quality customer support.
All of this increases business expenses and lowers the net profit margin.
2. Shipping costs
Furniture products are high-value items that take up a lot of space, with considerable shipping costs attached to them.
"Shipping rates are now equal to 100% of furniture prices," -Ryan Petersen, Flexport CEO
Retailers, direct-to-consumer (DTC) brands, and online stores pay for packaging, labor, and shipping. These expenses depend on the state of the supply chain and transportation costs. Naturally, the higher the shipping costs, the lower the profits.
Many brands have devised entire strategies to save on shipping costs. For example, brands like Article handle it themselves end-to-end. And IKEA famously pioneered flat pack furniture to decrease transportation costs.
3. Low markup
All furniture businesses, regardless of platform, attach a low product markup. This is because customers today prefer quality products at the lowest price. Besides, they have no shortage of options.
While the low markup doesn't impact the furniture profit margins directly, they do not buffer the significant shipping and overhead expenses. This reduces profits.
For the unaware, the average gross profit margin for a retail furniture business is over 40%. But that figure drops between 3% to 6% after accounting for marketplace fluctuations pre-tax. Even so, there are ways to increase furniture profit margins.
3 strategies to increase furniture profit margins (with examples)
1. Provide an omnichannel experience to buyers
An omnichannel experience allows buyers to have a consistent experience with a brand through different channels. In essence, a buyer can visit the outlet to physically inspect the quality and dimensions of furniture pieces. Then they can place an order online and collect in-store.
This tactic has improved inventory management for many retailers. After all, online buyers can buy products only when available. And retailers can conduct flash sales when the inventory is full.
An omnichannel approach also provides another key benefit to retailers – reduced returns.
Buyers can make more confident buying decisions online since they can check product quality in-store. This reduces the instances of returns.
Bed Bath and Beyond, an American domestic merchandise retail chain, deployed an omni-always shopping experience in 2020. Its customers could buy online and pick up the product in-store. Alternatively, they could opt for same-day delivery as well.
The online and offline experience was consistent, speedy, and convenient. The result? The brand saw dramatic growth in digital sales across several key categories. By February 2021, the brand noticed an increase in its gross profit margin by 20 bps, thanks to this approach.
2. Reduce labor costs
Today, tech enables businesses to automate a variety of daily tasks. Functions that previously needed employee oversight can now be performed with software. This reduces labor costs and, thus, operating expenses. And all of this increases the net profits.
Many companies have also downsized their operations to improve their profit margins quickly during financial difficulties.
Furniture manufacturer RC2 did this in 2009. It lowered its operating costs by $4 million to overcome low returns from its international sales.
The company reduced variable costs and improved its working capital too. As a result, RC2's net income grew by 3.5%, offsetting slower sales.
3. Invest in brand loyalty
According to research, even a 5% increase in customer retention rate could increase profits by 25-95%. This is especially true in furniture, where customers make high-value purchases.
Older buyers are more likely to buy products from retail stores they’ve previously had good experience with. But even prospective shoppers buy products from a store with many reviews.
This is why furniture stores that produce loyal customers are often more profitable. A case in point is IKEA.
The furniture giant has enormous showrooms packed with well-organized furniture to wow its shoppers. Customers can try the furniture, check the material and buy products immediately.
But that’s not all. They can drop their kids at the play area to shop conveniently. And if they feel hungry, they can even grab a bite to eat at the restaurant. Such minor considerations make the IKEA shopping experience a memorable one.
Shoppers come back time and again, and even make a day out of it. This builds loyalty and increases IKEA’s sales and profits in the process.
Challenges to increasing furniture profit margins
1. Changing customer preferences
The key to increasing net profit margins is catering to customer preferences. If their customers are active on TikTok, brands must consider marketing their products over the platform. Or, if buyers are demanding heart-shaped lamps, companies should ensure their inventory includes them.
Brands that recognize such customer preferences and act on them will more likely be recognized. Additionally, they will also see greater profits.
But customer preferences change quickly. So, meeting these expectations can be challenging. Fortunately, brands can track customer trends in a variety of ways.
They can conduct surveys or monitor the feedback on their social channels to recognize customer demands. They can also use their reviews to understand common concerns.
All types of furniture businesses compete for the attention of the same target group. And these consumers prefer the tactility of an in-store experience and the convenience of online shopping.
Naturally, brick-and-mortar and online shops must integrate aspects of the ideal shopping experience into their customer journeys. The good news is that technologies like augmented reality (AR) can help with this.
Brick-and-mortar stores can integrate AR to create memorable shopping experiences in-store. For example, they can include AR booths or AR product catalogs in their showrooms.
Also, online stores can integrate augmented reality furniture models on their product pages. This way, customers can virtually inspect and visualize the products in their homes.
Businesses can partner with 3D and AR companies like Enhance to create exciting customer journeys. This way, they will see better customer engagement. They will also have greater brand recognition and observe lower returns. And this will increase their net profit margins.
While net profit margins paint a realistic view of the success of a furniture business, they do not reveal all the details. Companies must therefore rely on other financial metrics to get a clearer view of business success.
Other financial metrics to consider for furniture businesses
1. Gross margin return on inventory
This metric shows the gross profit margin the brand earns for every dollar of its inventory. Simply put, it measures the profitability of the brand’s inventory. It is calculated as follows.
Gross margin return on inventory (GMROI) = (Total sales – Total cost of goods sold) ÷ Amount of inventory
2. Furniture sales per square foot
As the term suggests, this metric shows the total number of furniture sales per square foot of the store. It reveals if the rent paid is worth the sales made in-store. Naturally, higher furniture sales per square foot indicate a successful retail store.
3. Cash flow
This metric indicates the cash that can be used for business activities. It is calculated using the formula-
Cash flow = Cash used for operating activities + ( – ) Cash earned from investing activities + Cash earned from financing activities
Conclusion on challenges for furniture businesses
Furniture profit margins are known to be an indicator of business success. And companies employ various techniques to maximize them. But, they provide an incomplete view of success. After all, they do not account for the profitability of different types of spending.
So, businesses that want to be profitable must not rely on furniture profit margins alone. They must use other financial metrics to measure profitability in different respects.