30th October, 2023
Retail inventory management is often termed the ‘invisible hand’ of business.
Your customers don’t see it, but it guarantees your products are always on the shelves at the right price.
And yet, many businesses have no process to actively monitor their inventory or know how much it’s worth.
The result is that small businesses are losing ground on their profit margins to more efficiently-run enterprises.
Luckily, working out optimal retail pricing isn’t too difficult if you have a strategy in place.
Welcome to the retail inventory method, where we explain how you can easily calculate the total value of your products.
For a business to accurately price its products, it needs to keep on top of its retail inventory management checklist.
Once you have this bird’s-eye oversight, you can apply different types of pricing calculation methods, such as:
The retail inventory method is often favored due to its simplicity. For most businesses, it’s the ideal pricing method to use during standard market conditions.
But let’s explore the benefits and limitations of such a strategy to help you decide the best time to use it.
The retail inventory method works as an estimation of product value, and shouldn’t produce any unpredictable effects on stock levels.
However, it can be a lengthy process to calculate, and you won’t get the same results as inventory management software.
To begin using the retail inventory method, you need to calculate your cost-to-retail ratio.
This involves dividing the cost of your inventory by the retail price and multiplying by 100 to get the percentage.
Calculate the total value of goods you have for sale by adding what you already had to what you bought. This gives you an idea of the value of all the remaining products you could potentially sell.
Now, you must calculate your cost of sales by multiplying your total sales during the period by the cost-to-retail percentage.
This helps you see how much you’ve spent to make the sales happen.
The final step is to calculate your ending inventory.
To do this, subtract the calculated cost of sales from the cost of goods available for sale.
The number you get will be a rough estimate of your total remaining inventory value.
Let’s illustrate how this pricing model works in practice. In this case, imagine you’re a retailer that sells products used by law firms, or for inbound marketing for lawyers:
From here, you could adapt your inventory levels and price points according to projections of expected future demand.
In short, shrewd inventory handling is crucial if you’re to prevent stock wastage and keep products available at consistent prices.
To do this, you must adopt an inventory pricing model that does some of the legwork for you — after all, most businesses can’t do manual stock checks before every new order.
Luckily, the retail inventory method provides a pretty good estimation of your total inventory value, a necessity in fast-moving businesses.
Or, even better, you could leverage digital tools to get one leg up on your competitors.
Our business management software does a great job of handling your inventory and supply chain needs.
Why not check it out and see how MYOB can maximise your business’s efficiency?