Are you seeing your sales numbers climb but not seeing a corresponding increase in your bank account? That’s because hidden costs are draining your profits. The average retail employer cost per staff member is $25.89 per hour, and business insurance averages nearly $3,000 per year.
Retail cost analysis involves identifying, organizing, and evaluating all costs involved in running an ecommerce or retail business. You’ll uncover where your money goes, as well as how to price your products properly, hold the optimal amount of inventory, produce cost savings, and control your cash flow.
This guide shares the key components of a retail cost analysis, with a step-by-step guide on how to conduct one for your business.
Cost of goods sold (COGS) includes all the direct costs of producing or purchasing the products you sell. This might include:
For example, COGS for a candlemaker includes wax, wicks, fragrances, jars, lids, labels, shipping costs to receive these raw materials, and the labor required to assemble them.
Operational costs include administrative business expenses that aren’t directly tied to the production or purchase of goods. You might see these referred to as overhead costs, indirect costs, or operating expenses on your balance sheet.
Storing inventory comes with its own associated costs, such as storage fees, insurance, depreciation and obsolescence, and inventory shrinkage due to theft, damage, or loss.
Holding inventory cuts into your bottom line and ties up cash you could use for other purposes. Reviewing your inventory costs helps you avoid cash-sapping overstocks and further fine-tune your purchasing.
💡Tip: With Shopify POS, your inventory syncs automatically across all channels, so you never miss a sale or accidentally double-order. This means less dead stock, fewer rush orders, and happier customers, while also experiencing:
Pricing decisions are at the heart of cost analysis. When setting or adjusting prices, consider:
While discounting can boost short-term sales, it can also lower profitability. If used too frequently, discounts may lead customers to expect sales, reducing full-price purchases and devaluing the brand.
Retail is often a game of thin margins. Slight changes in your costs can have a major impact on your profitability.
Here’s what a retail cost analysis enables you to do, with examples:
Start by listing all the costs associated with your products. Don’t just focus on the obvious ones—dig into hidden operational costs, too.
It helps to categorize your costs into the following groups:
Divide your total costs by the number of units sold or produced to calculate your cost per unit. This helps you decide if your selling price is high enough to cover all costs and still leave room for profit. For example, if you produce 1,000 pairs of earrings for $5,000, your cost per unit (per pair of earrings) is $5.
Look at the breakdown of your total costs. What percentage is for salaries and wages? Inventory storage? Packaging? Visualizing your cost structure helps you identify areas for improvement or potential automation.
Suppose you run a gift shop and introduce a new line of custom journals. After a few weeks, your POS report shows that even though they’re selling well, the cost to produce the journals is squeezing your margins. You can quickly test a new price point or adjust packaging to bring margins back in line, all without waiting for a quarterly review.
Subtract your cost per unit from your selling price to calculate your gross margin. If you’re selling candles for $15 each and your cost is $9 each, for example, your gross margin is 40% ($6 ÷ $15). That means you keep 40% of your selling price to cover overhead expenses.
Between 30% and 50% is a good profit margin for retailers, but this can differ depending on your product, location, and industry. For example, apparel stores typically have lower margins (between 4% and 13%), while grocery stores often operate below 5%.
Take a harsh but honest look at how your pricing and promotions impact profitability. Are you using discounts as a bandage for slow sales? Are your high-ticket items carrying your business?
Try running scenarios like:
💡Tip: If you’re apprehensive about changing prices and seeing sales plummet, use a predictive analytics tool. This technology uses machine learning models to digest large data sets—such as sales history, market trends, weather patterns, and inventory analytics—to forecast potential outcomes without risking sales.
Retail cost analysis isn’t a one-and-done project. Set a schedule to review your costs quarterly or monthly. Use what you learn to adapt your strategies in real time—whether that’s renegotiating terms with vendors or adjusting pricing for new trends.
Let’s say you’re running pop-ups, online sales, and in-store promotions. You might assume your website drives most of your revenue, but Shopify POS reveals that your in-person pop-up events generate higher average order values and more repeat customers. With that information, you can shift marketing dollars or staffing accordingly to boost profits.
Shopify POS also lets you track sales by employee, so you can see who’s driving the most revenue per shift. If Sara’s Saturday shifts consistently outperform others, you can structure your schedule to match top performers with peak shopping times, helping reduce labor waste and boost sales without additional operating hours.
💡Insight: Retailers using Shopify POS observed an average annual GMV boost of 0.5% by reallocating staff efforts from data unified in the commerce operating system.
You don’t have to build spreadsheets from scratch or be a retail math whizz. These tools can help run a retail cost analysis:
Retail cost analysis isn’t an exercise in number crunching. It’s about taking control of your company’s finances. Understanding where your money goes means you can price confidently, cut waste, and boost profitability.
With Shopify POS, you’re not only tracking sales—you get real-time reporting on margins and inventory movement. It’s the tool that brings your retail cost analysis to life so you can make faster decisions to protect your bottom line.
Retail cost includes the cost of goods sold (COGS) plus a share of your operational and inventory costs. Use this formula: Retail cost = (Total direct + indirect costs) ÷ Units sold
Cost-benefit analysis (CBA) is a retail decision-making method that’s used to evaluate whether the financial benefits of a specific action—like launching a promotion, investing in new technology, or changing suppliers—outweigh the costs.
