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Simply put, a factor is just a different way of expressing a margin or a mark-up. For those who are new to retail math or accounting, margin is defined as the proportion of your final selling price that represents profit. In purely mathematical form, gross margin = selling price - cost of goods sold + annual sales return. Gross margin should not be mistaken for net profit where all expenses, such as office supplies or travel expenses, are subtracted. Mark-up is a percentage added to the cost price to get the selling price. For example, if you buy a dress at a wholesale price of $25 and price it at $50, then your mark-up is 100%. In mathematical form, ($50 - $25)/$25 = 1.00 or 100%. selling price - cost price/cost priceUsing the same numbers from our last example, where our selling price is $50 and the cost to buy the dress from our supplier is $25, our factor is simply 2.00. The way it is calculated is extremely simple, $50/$25 = 2.00. Yes, that is it. You simply take your selling price and divide it by the cost of your product, selling price/cost price. You have to remember that sales reps do not hold accounting or finance degrees and so just about all retail math is manageable with a little effort.In reality, you will most likely use a factor to determine the selling price. For example, the suggested industry best practice is to use a factor of 2.5. So, resuming our example above, we would take the cost of our dress, $25, and multiply it by our factor, 2.5, to get $62.50. Expressed as a mark-up, we are marking up our product by 150%. Nonetheless, you should not just use 2.5 as a given. You need to determine your factor based on several other components, such as your marketing mix, strategic position in the industry, and whether or not customers will actually believe in a 2.5 factor for your product. For example, it is a common practice that you should not price your products according to your factor, but what you believe your customers are willing to pay for the product. In some cases, the factor may be less than 2.5 or more than 2.5. It is important to remember that retail is becoming more and more customer centric and so it is important for the customer to dictate your selling price rather than a simple formula. Therefore, you should always work within a range of factors.Finally, we get to the reason why a sales rep will ask you what your factor is. Simply, they are determining whether or not your store fits in with their marketing mix. If your factor is too low, then they may believe you are cheapening their brand. If your factor is too high, then they may believe you will not move enough units. Therefore, a safe answer will always be to say your factor ranges between 2.2 to 2.8, depending on the product.
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