Boutique Tree Blog

Math and Fashion.. Oh what a match made in heaven.  Haha, jokes aside there are some basic math concepts that are fundamental to running your boutique.  Today let us look at 2 concepts, Margin and Markup.  Understanding these numbers and knowing how to calculate them will give you basic tools to evaluate the health of your business. 

First a couple definitions so we are on the same page:

Wholesale Cost – The price you pay the wholesale vendor.

Retail Price – The price your customers are paying you for the item.

Okay, on to the important stuff:

Markup is the easier concept to intuitively understand IMO.  Markup is simply the multiple of the Wholesale Cost that you are selling items.  For example, if you by shirts at a Wholesale Cost of $15 and your mark up is 2x then that means you are selling at a Retail Price of $30.  This is double or 2 times the Wholesale Cost. At a 3x markup you would be selling the product for $45.  This is triple the Wholesale Cost or 3x markup.

Here are example Retail prices for a $15 wholesale cost at different markups:

Okay, now that we understand markup we can dive into Margin.  Once you understand how they are related my hope is that it will become much more clear what various margins mean for your business. 

Here comes a math formula. Try to stay calm, we will walk this together. If you are starting to hyperventilate, grab a brown paper bag and take some deep breathes. We can do this together, I promise!

Margin = 1-(1/Markup)

Okay, let us look at this with some examples to make this clearer.

If your markup is 2x the formula would be 1-(1/2) = .5 which is 50% margin

If your markup is 3x then your margin is 1-(1/3) = 2/3 which is 66.7% margin.

My point is that margin and markup are directly related.  For each markup there is a corresponding margin.  Here are some examples:

An important thing to notice is that as you get higher, the amount of markup needed for each margin % becomes greater.  To increase your margin from 33% to 50% only takes changing your markup from 1.5x to 2x.  To increase your margin from 80% to 90% it takes increasing mark up from 5x all the way to 10x.  To illustrate this with an extreme example, let us say you are marking up 50x, which is 1-(1/50) = .98 or 98% margin.  To get just 1 additional margin % it would take going from 50x markup to 100x markup! (1-(1/100) = .99 or 99% margin.)

My point here is that as you slide up the scale each margin % takes more markup to achieve.  5% margin increase is a lot easier to achieve in the 40-50% range than if you have margins of 60-70%.

Now, we can pull it all together and look at markup and margin together:

Now that we understand markup, margin, and how they are related to each other it is important to talk about the pitfalls of fixating only on these numbers.  Margin can be a bit misleading because it does not account for unsold items. So be careful only fixating on margin. You need a strong sell-through rate as well to make money.  Check out another of my blog posts to learn more about managing and increasing your sell-through rate, Ignoring This Could Destroy Your Boutique.

Based on our personal experience and the consensus I have found across 1000s of posts on markup and margin here are some general rules of thumb to shoot for:

If you bring your items all in house, target 3x or 67% margin. It can be less if you are using drop shippers because you do not have nearly as much risk of left-over inventory and a lot of the expenses are built in for fulfillment. With a drop shipper 2x is normal but ones that target 2.1-2.25x are out there. To find a drop shipper that targets 2.1-2.25x you are in the right place.  Check out all that Boutique Tree has to offer and schedule an intro call with Amanda to learn how Boutique Tree services can help your boutique.

Disclaimer:  This blog is for informational purposes only.  Nothing herein will be construed as a promise or guarantee of results.  All businesses are different and individual results will vary.  I am not a business coach, accountant or financial advisor.  If you are seeking a professional opinion on how you should proceed to achieve your personal goals, please consult a professional.

We have incredibly exciting news!!  We are moving to a larger warehouse, which means tons more amazing things are coming for our members!  Our new location has over 8,000 sq/ft of space and is located in the popular technology/business park, Southpointe, off I-79 just south of Pittsburgh. 

In our new space we are converting a couple of the offices into Live Show Rooms.  These rooms will be open to members to come into our facility and do live shows right on site.  You will simply pick the styles beforehand that you want to show during your live and we pull them in your size for you prior to arrival.  You would then go live to your customers to sell Boutique Tree items and once you are finished we put the items back, invoice you like normal the next business day, and ship the items to your customers.  Sounds awesome, doesn't it? Yes, yes it does. :-)

We see this as a great opportunity for those within a couple hours of Pittsburgh to take advantage of on a consistent basis.  We also encourage those from farther way to make a trip into Pittsburgh, especially if you have never been here!  We always loved paying for trips with a takeover when we traveled in our yonder years so come in, do a live, make some money, then go explore! 

There are multiple hotels right in the Southpointe technology park.  Along with a number of restaurants and shops on Main Street. The Meadows Racetrack and Casino is only 10 minutes away and right across the street from the casino is Tanger Outlets. 

Downtown Pittsburgh (or should i say.. DAAHN TAHN!) is just 25 minutes North of our facility.  There is always something going on in the city to check out.  You can even bribe your husband or significant other with tickets to a Pittsburgh Penguins, Steelers, or Pirates game!  We have another Casino downtown too.  (I know we like to gamble here.  At least we can admit we have a problem, right?) There are also great shows at Benedum Center all year round.  Pittsburgh has some fantastic restaurants from high end dining overlooking the city on Mount Washington to grabbing a beer and sandwich at Primantis in the Strip District. You will find something for you.

Well anyway.. it is almost 3:30am and we are packing and moving all day tomorrow! Moral of the story.  I love Pittsburgh and so should you!  Come visit, make some money and have some fun while you are here! 

We invested in this particular location because we felt it would bring our members a lot more value than cheaper options off the beaten path.  We would love for you to take advantage of it!  Come visit us!

 -Casey

Over the last year we have had the opportunity to talk to hundreds, if not a thousand boutique owners across the country about the pain points of their shop.  The list of possible struggles is long, and each boutique has its own unique story and set of challenges.  However, there is one struggle that continually comes up time and time again.  This aspect of your business can single handedly be the difference between a thriving, growing, and fulfilling experience as a boutique owner and a cash sucking monster.  Ignoring this key detail will almost certainly result in failure and a broken heart as your dreams come crashing down.  If you are thinking I am describing your margin you would be very wrong.  Dwarfing the importance of your gross margin is your sell through rate.

Your sell through rate is quite simple to calculate.  Look style by style and divide the number of items sold by the total purchased.  This is your sell through rate.  If you bought a full size run in 2-2-2 packs for sizes S-3xl then that would be 12 items purchased in that style.  If you sold 7 then your sell through rate would be 7/12, which is 58%.  There are other ways to calculate sell through, but this is the most straightforward. 

Understanding your sell through rate and developing strategies to maximize sell through are imperative to a healthy boutique.  Even if you do not run a perfect shop, having a high enough sell through rate can compensate and even mitigate the negative impacts.  Alternatively, it is nearly impossible to mask a low sell through rate even if every other aspect of your business is on point!  I am tempted to say it is 100% impossible but I have learned to steer clear of such absolutes.  What I am saying is, if your sell through rate is not in an acceptable range it is inevitable that it will wreck-havoc on your boutique.  I hate to be so harsh, but I cannot over emphasize how important your sell through rate is to your future success. 

Let us look at an example of the impact of sell through. Meet Jenny: Jenny runs a boutique and sells around $15,000 in product sales per month. Go Jenny!  Jenny is pricing products at a very respectable average of 3x the wholesale cost.  This means that on average if she buys products for $15 then she is charging her customers $45 for the style.  When Jenny talks to her bookkeeper everything looks amazing.  Her gross profit margin is above 60% and according to her books she is making good money monthly.  The problem is that when Jenny looks at her bank account there is not money in there.  Why is that?  Where is her money?  Any guesses….? The problem is all that “paper profit” is sitting in excess and stale inventory.  Jenny has a sell through rate of 50% so for each run that she buys she is selling half and the other half is sitting on her racks and books as cash. Unfortunately, your landlord, utility company, grocery store, or anywhere else for that matter does not value your inventory as cash.  Try paying your water bill with a few left-over dresses from last season and see how well it goes.  I would not get your hopes up.  Sure, you can discount the items but then your overall margin will drop so your sell through needs to even be higher to make up for the difference. You could save the styles for next year but there is a very real cost to storing inventory.  You must pay someone to box them up or they take up space for items that would be selling.  They will slow and bog down your whole system making you reliant on selling old unwanted inventory instead of focusing on bringing in new seasonal items. 

Since Jenny is selling through at 50% that means to sell $15,000 per month at 60% gross margin she is buying $12,000 of product per month to fund those sales.  [Ex. (15,000/.5*(1-.60))=12,000].  You may be thinking Jenny has made $3,000 in cash if she bought $12,000 and sold $15,000, but this would be leaving out a boat load of expenses that need cold hard cash to pay.  It costs $1,500 in shipping to get your products, transaction fees are another $500, you hire a part time employee 20 hours a week at $15 per hour to help with intake and shipping which costs about $1,300 per month.  Uh-oh, our expenses are already $3,300 and we haven’t even added in shipping supplies, cost for shipping promotions, advertising, taxes (since there was a paper profit on your books), utilities, internet, rent, PAYING YOURSELF, etc. Do you see the problem here?  A sell through rate of 50% has created significant negative cash flow monthly.  When your bookkeeper tells you that you made $4,000 last month but you look at your bank account and have no cash and money on a credit card to cover expenses then there is only one place to look for that profit. Your old inventory.  There it is just sitting there, out of season, with holes in your popular sizes, taking up space, costing you money, and draining opportunity by the minute.  Next month you may not have enough cash to buy the $12,000 in products to sell $15,000 so sales start to drop.  Each month your cash gets lower and your old inventory gets bigger spiraling you down closer and closer to failure.

Sadly, this is by far the most common story I hear from boutique owners. Time and time again I hear people say they sell L and XL great but cannot sell a S or M to save their life.  The sizes specifically vary from boutique to boutique, but the issue remains.  Daily I hear from boutique owners in this situation, some of whom are not even aware of the hole they are in and others that are completely petrified because they have awoken to the fact that what they are doing is not working. 

You might be feeling a bit discouraged right now and asking where to go from here.  The good news is that there are strategies to increase your sell through rate. Let’s take a closer look at 3 ways to immediately improve your sell-through and in turn the health of your boutique.

One option is to run pre-orders to your customers to get sales before placing an order. Collecting orders from your customer prior to purchase is a great way to immediately increase your sell through rate. While on the surface this seems like an ideal approach there are several draw backs.  For example, we live in an on-demand world, so most customers are not willing to wait 4-6 weeks to receive the products they pay for.  You could wait to accept payment until you receive the product but many that have tried this find that a significant number of customers no longer want the item when they need put their money where their mouth is.  There is also the obstacle of dealing with wholesale vendors for pre-orders.  Anyone paying attention during this past Holiday season will recall the endless posts of vendors products being delayed or never coming in time for the Holidays. It only takes 1 or 2 times that a product is delayed for your customers to avoid pre-orders, severely damaging your pre-order sales. You also still have the cost of the products being shipped to you then the work and money to ship them to your customers.  Running pre-orders can have a positive impact on sell through rate and when there are no hiccups there is opportunity in utilizing pre-orders with good reliable vendors to make money.  Unfortunately, the drawbacks are dramatic.  I believe we can do better so let’s explore another option.

Another option is to find a great Open-Pack and Ready-to-Ship vendor that brings in new products regularly.  Working with an open pack vendor will allow you to buy outside the typical pack distributions so that you can purchase in runs that are in line with your customers’ buying. If selling a small is more difficult than getting a crying 2-year-old in a car seat, then don’t buy any smalls!  Especially if the vendor is Ready-to-Ship and has smalls on hand.  Wait until you need a small to purchase it instead. By not buying in sizes that you struggle to sell and buying more in sizes that sell well your sell through rate will get a much-needed boost.  Knowing items are on hand and ready to ship simplifies the buying process and eliminates the pain points of waiting on orders or pre-orders for months.  I cannot tell you how often vendors have tried shipping me products 2 months after they were meant to arrive as we head into the next season.  Try selling a bunch of tank tops in mid-September that were supposed to arrive by the end of June.  It is tough and your sell through rate is sure to feel it.  So that begs the questions…where do we find trusted, good quality open pack wholesalers?

Check out Breakers Wholesale for a great Open-Pack and Ready-to-Ship vendor that carries a wide variety of styles in the most popular boutique brands.  With bulk pricing on Ready-to-Ship styles, it is easy to grab the distributions that  match your customer needs.  If you do not sell 3XL well, then do not buy any 3XL. If you have a customer come along that wants a 3XL then check back to Breakers Wholesale to see if a 3XL is available.  Since you know everything on BreakersWS.com is Ready-to-Ship and there are no minimums or packs required, you can then have the package shipped directly to your customer!  Think about that for a moment…this is extremely important, so I want to take a moment to make sure you digest what just happened.  If you do not sell 3XL well and did not buy any to have on hand you inherently increased your sell through rate by buying sizes closer to what your customers will buy.  Now in the off chance someone came along wanting a 3XL, you were still able to fulfill that order and have the package sent directly to the customer.  This is powerful stuff!  So now selling a single 3XL just increased your overall sell through rate by selling 100% of the 1 you bought. Instead of needing to stock a bunch of 3XL that typically are a drag on your overall sell through rate, you turned the exact same purchase into a sell through rate booster! This is a game-changer! This is the simplest form of Do-It-Yourself drop shipping which brings me to my final strategy for increasing your sell through rate: Work with a Premium Drop Shipper!

In its most basic form, drop shipping is paying wholesale for a product after your customer makes a purchase and having it shipped directly to your customer. Sounds great, right?!? That is a sell through rate of 100% all the time!  Since your customer paid you the full retail amount before you pay the wholesale cost, it essentially flips the traditional cash flow scenario on its head.  Instead of buying from the vendor before making a sale, you are now only purchasing the item AFTER you made the sale.

It is no surprise that Drop Shipping has went mainstream in the boutique world over the last year, but it is important to note that not all drop shippers are created equal.  While it is fine to work with as many basic drop shippers as you want it is important to have at least one Premium Drop Shipper to act as your foundation. 

• A premium drop shipper will typically offer product launches on a regular schedule with a guaranteed number of styles in all sizes in each launch. This gives your boutique stability knowing that you have a wide range of products to show your customers on a regular basis with no upfront inventory cost.
• Most premium drop shippers utilize a 2-way data sync that relays what was purchased by your customer along with their shipping information for automated fulfillment. If you are using a drop shipper that requires you to run to their website to make each individual purchase with your customers shipping information, then they are not a premium drop shipper.  This is a DIY approach that puts a significant amount of work on you to fulfill orders.  It also increases the risk an item could sell out in the time from when your customer placed an order and when you can place the order on the vendor site. Then, there is also the occasional mishap of typing in the wrong customer address which happens more regularly than you could imagine! There is nothing wrong with this basic drop shipping set-up, but it is important to illustrate the fundamental differences between basic drop shipping and working with a premium drop shipper that has processes specifically designed for you to maximize the benefits of drop shipping.
• A premium drop shipper offers high quality photos on models in a range of sizes. These are essential for your customers to see a model similar to them in the product and to truly envision what the product would look like on them.  This also helps to significantly decrease the number of returns.
• A premium drop shipper allows sample purchases ahead of time. This is a great opportunity for you to snag one piece of the styles that you would like in your size to be able to show your customers the style on you. After all, the reason your customers shop with you is because they like YOU! Show your customers how you style these products in live shows, fit videos, or photos.  Mama needs a great wardrobe too!
• A premium drop shipper customizes the return label to match your boutique name and address. This allows you to maintain your boutique’s brand and eliminates customer confusion when they receive your packages.
• No long-term commitment. A premium drop shipper offers their services on a month-to-month basis as the industry standard. 
• Monthly fee required. These premium drop shippers are saving you countless hours of sourcing, intaking, quality control, photography, creating descriptions, and of course shipping directly to your customer.  A monthly fee is natural with this level of full service.

For the highest level of drop shipping service check out the premier drop shipper, Boutique Tree.  Boutique Tree offers all of the important aspects of a premium drop shipper detailed above and much more.  Boutique Tree has multiple weekly launches (including a brand new shoe launch!) to choose from which are curated into cohesive looks to help you to maximize upselling.  This service offers a daily consolidated invoice which allows for orders to be combined for shipping if a customer placed multiple orders or you want some orders shipped to you for pick up.  No need to run to boutiquetree.com in a frantic dash to place your order!  Instead,  items are held for you until you pay your consolidated invoice in a relaxed, stress-free fashion. This feature can dramatically reduce overall shipping costs when the alternative is paying $6-$10 per order.

Let’s revisit Jenny and see how she is doing now that she signed up for a premium drop shipper like Boutique Tree.  Jenny now has a steady source of new products to show her customers with great photos, full size runs, and a whole lot of extra time on her hands.  She is still selling $15,000 per month and her product costs are about $7,000 because she is paying for products only after they sell!   Transaction fees are still $500.  She does not need an employee since the intake and shipping are being done for her by the drop shipper.  Jenny also avoids the shipping costs of having inventory shipped to her to have on hand.  Let’s assume Jenny is charging shipping but with promotions it costs her $250 more than she charged. After paying these expenses, Jenny is left with $7250 of cold hard cash.  Without the need for a large space to store inventory, rent becomes a non-factor.  Now Jenny can pay the internet, utilities, and advertising fees with another $1,000 of cold hard cash. The premium drop shipper charges a monthly fee of $300.  Jenny is still left with $5,950 per month of actual cash.  Remember before even paying all her expenses Jenny was cash flow negative in our prior example because all her “paper profit” was sitting in old inventory. By utilizing a premium drop shipper Jenny has taken her sell through rate to nearly 100%.  The minimal reduction in margin and monthly fees associated with a premium drop shipping service are greatly outweighed by the time saved and a huge boost to overall sell through rate.

We can take this a step further to maximize profits once you have maximized your sell through with a premium drop shipper.  Through your drop shipper you should get a wide array of products to show your customers.  By showing so many products you can keep tabs on the types of styles that you do sell exceptionally well.  While from a convenience perspective using a premium drop shipper may be the best fit for you, there is no secret that if you can sell through full runs it makes sense from a purely financial perspective.  If you have the time to ship or have staff already to do it for you it is a great opportunity to isolate styles you can sell through at least 85-90%.  Buy runs of those styles and sell them baby!  No one is stopping you and if you want the additional workload you should be looking for these kinds of styles.  In my opinion, best way to find styles that you can sell through well at a high enough rate is by offering a wide array of styles to your customers that you do not pay for upfront. Then learn what they are buying from you and go capitalize on it.  Drop shipping is a tool to maximize your sell through rate which will clean up a lot of the inherent pitfalls of the boutique world naturally. It can be used to run your whole shop or as a foundation to give you the structure and cash flow to invest in the right type of other styles to carry on hand.

To hear more about how working with a premium drop shipper would benefit you and your boutique, visit BoutiqueTree.com.  Then set up an intro call with Amanda to learn more and get started!

Disclaimer:  This blog is for informational purposes only.  Nothing herein will be construed as a promise or guarantee of results.  All businesses are different and individual results will vary.  I am not a business coach, accountant or financial advisor.  If you are seeking a professional opinion on how you should proceed to achieve your personal goals, please consult a professional.