Healthy profit margins are a sign of a buoyant furniture business – but how can companies achieve them? This article explores the concept of furniture profit margins, strategies to improve them, and how they compare to other business metrics.
Key Takeaways:
- 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 total expenses. They are calculated in two ways: gross profit margin and net profit margin.
1. Gross profit margin
Gross profit margin shows 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 according to a simple formula:
Gross profit margin = (gross profit ÷ revenue) x 100
Where, gross profit = revenue earned – cost of furniture sold.
2. Net profit margin
Net profit margins are calculated to understand the underlying financial viability of a business:
Net profit margin = (net profit ÷ revenue) x 100
Where net profit = revenue earned – the cost of furniture sold – operating expenses – interest – taxes.
There are huge variations in net profit margin in the furniture space, owing to how net revenue, sales, and operational costs differ between businesses, along with interest and taxes.
Nonetheless, net profit margins give an insight into the stability of a furniture business, while also pointing to how earnings are being spent or invested.
3 factors influencing net profit margins
These are three of the key factors that can determine furniture profit margins:
1. Overhead costs
Running a successful furniture business involves more than just putting products on display and waiting for a sale. Today, retailers must ensure they provide an enjoyable, engaging, and effective customer experience in order to drive conversions. This gives rise to overhead expenses.
Some furniture retailers invest significant sums on décor, lighting, and store design, while others might prioritize spending on in-store staff to ensure quality sales and 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,"
- Flexport CEO Ryan Petersen
Retailers, direct-to-consumer (DTC) furniture brands, and online stores pay for packaging, labor, and shipping. These expenses are determined by the supply chain and transportation costs. Naturally, the higher the shipping costs, the lower the profits.
Many brands have devised entire strategies around saving on shipping costs. For example, brands like Article handle the process themselves end-to-end, and IKEA famously pioneered flat pack furniture to decrease transportation costs.
3. Markup
A product’s markup is the difference between the price a retailer charges customers and its wholesale cost. Markups in the furniture sector vary, with data suggesting they range from 20-50%. The markup is used to cover costs and overheads, with the remainder going to profit. Increased competition from new and existing players in the market and a willingness by consumers to shop around can contribute to a downward pressure on markup levels. When this happens, it reduces the slice left for profit. Similarly, macroeconomic trends which cause costs to rise can also eat into that slice.
The average gross furniture profit margin is over 40%. But that figure drops to between 3% to 6% after accounting for marketplace fluctuations pre-tax. Even so, there are proven strategies brands can use to increase furniture profit margins.
3 strategies to increase furniture profit margins
Retailers can increase profit margins in one of two main ways: by growing revenue or reducing costs. Here are three key tactics companies can employ to boost furniture profit margins:
1. Optimize the omnichannel experience
An effective omnichannel strategy allows buyers to enjoy a consistent buying journey through all of a brand’s different channels. A buyer can research potential purchases via the web, visit a store to check out dimensions and quality in person, then place an order online and have it delivered to their home, or collect in-store.
This tactic has improved inventory management for many retailers. After all, online buyers can only buy products if they’re available. And it enables retailers to conduct flash sales when the inventory is full.
Optimizing the omnichannel experience also provides additional key benefits such as improved conversion rates and reduced returns.
Today’s online buyers weave between physical and digital touchpoints. A common buying journey might involve discovering a product on social media, researching it online, reading user-generated reviews, viewing it in store, then ordering through the website for home delivery or click and collect. An optimized and seamless omnichannel approach ensures products are presented accurately, consistently, and in their best light in each of these touchpoints. This helps reduce cart abandonments and boost orders. And for completed sales, it helps reduce the chance of returns due to disappointment in product quality or unmet expectations.
IKEA exemplifies successful omnichannel retailing by seamlessly integrating digital and physical shopping experiences:
- Customers can browse products, check stock, and make purchases online or via app.
- This is complemented by click-and-collect services and in-store navigation tools.
- The IKEA Place app and IKEA Kreativ enable shoppers to customize products for color, material, and texture in real time.
- They also enable in-home furniture visualization via augmented reality, allowing customers to try before they buy.
- Customer interactions like these prioritize personalization and convenience, two of the key features of a successful omnichannel approach.
These strategies have positioned IKEA as a leader in creating a consistent and engaging shopping journey, driving customer satisfaction and boosting furniture profit margins.
2. Reduce labor costs
Today, technology enables businesses to automate or streamline numerous tasks. And the rapid evolution and application of technologies such as 3D, augmented reality (AR), and artificial intelligence (AI) mean that new efficiencies are regularly being found. Examples include:
- Use of digital twins to plan and optimize stock management, store layouts, and staffing requirements.
- Customer experience automation, such as AI-powered chatbots for basic customer service queries and personalized product recommendations.
- 3D and AR to enable customers to independently customize products and utilize room planning tool.
- Smart delivery planning systems that optimize routes for traffic and fuel efficiency.
Many companies have also downsized their operations to improve profit margins quickly during financial difficulties.
Furniture manufacturer RC2 did this in 2009, lowering its operating costs by $4 million to overcome underperformance in 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% uplift in customer retention rate could increase profits by as much as 95%. This is especially true in furniture, where customers tend to make higher-value purchases.
Shoppers of all ages are more likely to buy from brands with which they have previously had a positive experience. Positive reviews also have a significant role to play, with 90% of European shoppers stating that authentic reviews increase trust in a company.
The other aspect to consider is investing in a brand identity that is distinct, differentiated from competitors, and which fosters customer affinity.
An example of a furniture business that has achieved this successfully in recent years is Kave Home. Established as a regional manufacturer and distributor, the company has grown into an international furniture giant with a presence in more than 80 countries. Turnover has grown almost tenfold in less than a decade, with 30% growth in 2023 alone.
This was achieved through a number of strategies, but central to their financial growth has been a relentless focus on brand identity. Forging a distinct product range, in-store design ethos, and focus on customer tastes has resulted in a distinct company identity that drives standout and, crucially, repeat business.
Challenges to increasing furniture profit margins
Examining two of the major barriers to increasing 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 should consider marketing their products on that 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, and as a result, 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, and they can use customer reviews to understand common concerns.
2. Competition
All types of furniture business compete for the attention of the same broad target group. And these consumers prefer the tactility of an in-store experience and the convenience of online shopping. Research by McKinsey found that 75% of consumers now shop both online and in store.
“Stick to new COVID-19 era habits, or go back to the old ways of doing things? For most consumers, the answer seems to be ‘both’.”
- McKinsey & Company Consumer Pulse Survey
Naturally, bricks-and-mortar and online retailers have to integrate aspects of the ideal shopping experience into their customer journeys. This relates to prioritizing the omnichannel experience as discussed above. At the heart of this is ensuring that your furniture business is not left behind as others embrace this shift.
As product customization, visualization and similar immersive techniques become the default in the furniture sector, along with AI-powered efficiencies and automation, brands have to keep up with changing customer behavior in order to thrive. By investing in their digital presence, customer experience, brand identity, and in-store offering, companies can help ensure they protect and bolster their profit margins.
Other financial metrics to consider for furniture businesses
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 also monitor a number of other additional financial metrics to get a clearer view of business success:
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
Mastering furniture profit margins for long-term success
Understanding and optimizing furniture profit margins is crucial for achieving sustainable profitability in a competitive market. Strategies like reducing operational costs, enhancing omnichannel customer experiences, and fostering brand loyalty have proven effective for businesses aiming to secure financial stability. These approaches not only address immediate profitability concerns but also position businesses to adapt to evolving market conditions, such as shifting consumer preferences towards interactive online buying experiences and increasing competition. By implementing these measures, companies can balance revenue growth with cost management to achieve healthier margins.
To gain a comprehensive perspective on business performance, it’s important to look beyond profit margins alone. Metrics like cash flow, gross margin return on inventory, and sales per square foot provide valuable insights into operational efficiency and financial health. Together, these data points help furniture retailers identify areas for improvement and make informed decisions to drive long-term success. With a strategic focus on both profit margins and broader financial metrics, businesses can build a strong foundation for sustainable growth and a competitive edge in the industry.
Contact Enhance to learn how we can help you boost your business profitability.
