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How to properley use categories

How to Properly Utilise Categories and Get the Most from Your POS Software

- By Jeff Haefner

Your first tip is a very simple, yet very powerful method to increase profits. And it's something you need to start doing right away! Let me explain...

When you first start using your POS software, you need to add your inventory. Right? You take each piece of merchandise and enter the item number, cost, selling price and other pertinent information into your POS system. Then when you sell those items, the software remembers the details of each transaction -- so you can pull up a variety of reports at a later date. For example, you can pull up a report that shows how many XYZ widgets you sold yesterday. Now this is powerful in itself, but there's a much more powerful way to utilize your POS software.

One of the MOST important steps to getting the most out of your POS software is to properly assign departments and categories to each inventory item. (If you're a softlines retailer, you probably use the term "classifications".) In any case, few retailers utilize departments and categories correctly. And this is an absolutely essential step to getting the most from your POS software.

When done properly, categorizing your merchandise can give you powerful information that allows you to manage your business MUCH more effectively. Let me give you a simple example and then show you how to utilize this information to maximize your profits...

Let's use a sporting goods store as an example. A typical store might have departments like: Fishing, Hunting, Clothing, Footwear, and Camping. Then each of these departments would have categories within them. For example, the "clothing department" might have categories like: Jackets, Hats, Gloves, Pants-Shorts, Underwear, and Shirts.

Seems pretty simple, right? Hang on - there's more to it...

First of all, as a rule of thumb you should NOT have more than 10 departments and 10 categories with in each department (that's a maximum of 100 total categories). If you assign over 100 categories, you'll end up with too many insignificant categories that account for less than 1% of your business. Many retailers think they need more categories, but even the largest retailers in the world manage their businesses with great success by using less than 100 categories (including Wal-Mart).

The technical definition of a category is a grouping or assortment of merchandise that the customer finds interchangeable. When creating your categories, think about what your customer is going to buy. For example, if a customer walks into your store looking for a tent, they probably aren't going to buy a bicycle. But they might choose a different size or brand of tent. So tents could be a category.

Now comes the interesting part...

Once you have categories assigned to your merchandise, you can use your POS software to quickly create some very powerful reports. Here's one example:

Sales total for August 2004:

Category	Sales	Cost	Profit	Profit %
Jackets	$3000	$2550	$450	15%
Shirts	$1200	$900	$300	25%
Gloves	$500	$300	$200	40%
Department total:	$4700	$3750	$950	20.2%
Category	Sales	Cost	Profit	Profit %
Tents	$8000	$4100	$3900	48.7%
Sleeping bags	$6000	$3500	$2500	41.6%
Air mattresses	$5800	$3000	$2800	48.2%
Department total:	$19800	$10600	$9200	46.4%

This might seem like a bunch of numbers, but the key to maximizing your profits is how you utilize this information!! Here's the trick...

First of all, you need to look at your sales and profit margin for each category on a daily, monthly and yearly basis. Then ask yourself the following questions.

If the profit margin for this category is HIGH, then ask yourself...

• Why is my profit margin high?
• Are my sales totals high or low for this category?
• Should I dedicate more floor space to this type of merchandise? Will I sell more if I do?
• Should I train my employees how to sell and push this merchandise?
• Am I running out of stock and losing sales in this category? (Your POS system should have another report to quickly give you this information.)
• Which product lines are making me the most money in this category?
• Should I order more of a certain product line that is very profitable? (Hopefully your POS system offers an easy way to drill down and view this information. You also need to assign a manufacturer/product line to each inventory item to have this information available.)

If the profit margin for this category is LOW, then ask yourself...

• Why are my profits low?
• Are my sales totals high or low for this category?
• Should I stop ordering this type of merchandise and eliminate it? Can I replace the empty floor space with something that's more profitable?
• Which product lines are making me the most money in this category?
• Should I switch product lines?
• Can I find a supplier with better prices?
• Can I negotiate better prices with my existing supplier?
• Did the profit margin in this category change from yesterday or last month? Why? Do I have a pricing error? Do I have an employee discounting without permission?

I can't stress how important it is to analyze your financials on a daily basis. Small adjustments can make a huge difference on your bottom line. But you need to be careful about jumping to conclusions. You need to consider other factors that might skew the numbers, including over-stock clearance sales, lost leader discounts that get customers in your store, and the proper product mix to keep customers coming back.

In addition, you need to collect enough historical data to make accurate decisions. That's why it's so important to categorize your merchandise right away and start collecting data. That's one of the first things you should set up in your POS software.

Whether you have a POS system or not - categorizing your merchandise is a very important retail management fundamental that successful retailers have used for years. You can (and should) implement this concept in your business even if you don't have a POS system. However, a good POS system makes it much easier, saves time, and gives you the reports in real-time.

To Your Success.

Jeff Haefner