In 2016, the U.S. furniture market was worth about $114 billion. However, growth in consumer spending on in-store furniture softened considerably in 2017. A variety of factors ranging from consumer trends and lifestyle shifts to increased online competition are part of the formula. That doesn't mean your furniture store is part of the overall sluggishness, but determining your profit margin and understanding what influences it are crucial to evaluating how your small business is performing.

What Is a Profit Margin?

Revenue shows how much your furniture store earned, and profits show how much money it has made in absolute terms. A profit margin tells you how much in funds you're keeping after you subtract your expenses from revenue captured through sales. For example, if your store generated $1,000,000 in revenue last year and accrued $800,000 in expenses, the difference of $200,000 equates to a net profit margin of 20 percent.

Why Profit Margin Is Important

If you want to know how financially stable your business is, your profit margin is a vital tool in this process. It also is helpful in identifying whether your prices adequately take into account all costs required to keep your store running – factors in key components like payroll, overhead and marketing. It's useful in outlining where your resources and your staff's time may be better spent. Do you really need to pay someone to dust or wash your windows after hours when employees are standing around waiting for customers to walk in? By having employees do these tasks during downtime, you can direct those extra funds toward improving your point-of sale-system or inventory tracking software or increasing your marketing budget to attract more traffic.

High Overhead 

Just by the nature of its inventory, a furniture store typically has high overhead. In addition to accommodating plushy sectionals, California King mattresses and their headboards and massive entertainment centers, utility costs to keep the lights on and the climate controlled can add up in freezing winters and scorching summers. This takes a toll on your profit margin by increasing your expenses.

Low Markup

High overhead pairs poorly with a notoriously low markup rate from wholesale to retail in this industry. Add on shipping costs, production delays and the growing influence of online retailers, and you’ll understand how the average furniture retailer winds up with pretax profits of a mere 3.3 percent.

Online Competition 

Internet sales of home furnishings totaled $19.2 billion in 2016. With the ease of virtual shopping at all hours and from practically anywhere, consumers can shop many options without the hassle of driving, carving out time in a busy day to peruse multiple vendors, or enduring what many perceive as pressure from a hovering salesperson. Many online vendors entice with free shipping and can't-pass-up return policies that a small brick-and-mortar business can't easily match.

Millennials 

Believe it or not, this tech-savvy can't-live-without-internet generation has an affinity for the brick-and-mortar furniture retailer. The millennial demographic purchased 63 percent of their interior furnishings in-store, according to a 2017 survey. This is an untapped customer base that goes against the tide of other age groups, so think about adding pieces that cater to items millennials seek on what is likely a limited budget. They window shop virtually before purchasing in real life. Get ideas from the same online places they do: Pinterest, Houzz, Remodelista and store sites like Ikea, CB2 and Design Within Reach.

You may not be able to control consumers' changing budgets or tastes, but you can adjust your inventory and marketing strategy to respond to them. For example, the trend of more apartment living and single-person households suggests greater demand for compact and multifunctional furniture, as well as products offering storage solutions. Consider adding pieces aimed at accommodating older consumers who want to live independently in their own home, such as chairs with higher seating and armrests that enable easier movement than sunken plushy sofas that are difficult to get in and out of. Also, lower home-ownership levels mean more renters who likely seek lower-cost furniture options than pricier investment pieces. Ponder replacing some of the high-end inventory that sits around for a long time with quality yet affordable pieces. Just remember to keep an eye on your margins to make sure you're maximizing revenue on the sale of those pieces.

Tip

If you want to boost your sales and therefore your profit margin, consider these ideas:

Custom order pricing: Focusing on custom products that take more time and work for all parties involved justifies raising prices, which can increase your margin.

Markdown pricing: For merchandise that's been sitting around for around 60 days, consider remerchandising it. If that fails, start marking down the retail price by, say, 10 percent. If it's still not turning in another 60 days, mark it down another 10 percent. Keep repeating this process until the item is gone. This approach helps move merchandise faster while achieving a higher margin.

Add-on sales: Track and encourage add-ons like warranty, fabric protection, accessories, lamps, rugs, adjustable bases, sheets and pillows. For example, if you can increase the percentage of warranty sales to total sales, your overall margin increases due to the high margins selling these plans provide.

Reduce online comparisons: If a customer claims to have found a better price on that recliner online, feel free to match it if it is directly comparable and doable. To reduce the occurrence of this, rebrand any heavily shopped or showroomed items to disguise the vendor and model numbers.