February 02, 2023

Category Development and Gross Margin Dollars

Here's one that comes up all the time.

A brand has a category with an average price point of $30 and an average cost of goods sold of $14. Gross Margin = (30-14)/30 = 53%. Gross Margin per Unit = $16.

Meanwhile, another category has an average price point of $40 and an average cost of goods sold of $22. Gross Margin = (40-22)/40 = 45%. Gross Margin per Unit = $18.

Which item should be sold if you can only sell one item?

There isn't a good answer to this question. One item has a high margin but a lower price point. The other item has a lower margin but a higher price point, yielding more gross margin dollars.

Do the work here.

Does one category feed the other? In other words, does the high margin category push customers to the low margin category? That could be ok if AOVs are similar. If AOVs are lower in the low margin category, then you are creating problems.

Anytime you switch a customer from a high margin category to a low margin category, you have to increase the amount of spend to compensate for the switch. Analyze the heck out of these dynamics, then push customers to high margin / high spend categories (or items) where possible.

Next week, we'll begin to explore Category Dynamics in even more detail, reviewing the reports I look at. We're going to see that some categories are "feeder" categories, while other categories are the center of your solar system. Once we learn how all of your categories work together, we can come up with a coherent marketing plan to support increased profitability.

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