OCTOIlER 6, J 923
THE
MUSIC TRADE REVIEW
5
What Is the Overhead Expense Limit
Investigation of Overhead Expense in the Retail Music Store Shows Widely Varying Results- Determining
Net Profit in Relation to Gross Sales The Basis of Figuring the Mark-up Must Be the Same as That
of Overhead -One Hundred Merchants Co-operate in Review's Investigation
. .,.:."
Fundamental in the entire question of oV ~ P
ve r cent for profi \;~ 9r 30 per cent gross margin,
will be a suffi c ient" mark-up. As a matter of
head expense in the general retail music s tclr e
fact, sales upo n th is ba s is will o·nly bring him
is the question of a fair net profit. For. b·c forc
$ ~,]OO, the mar-giri for overhead and net profit
thi s question call be discu, se d at a ll, it is· esS en
being but $2,100. H e has used two bases for
tial to know what the retail music merchant
must ge t in this shape on hi s g ross volullle of . fi g uring , the s ellin g pri ce for his overhead and
thc ' cost price for his g ross ·mar gin.
sa le s. To determine his mark-up s, a nd the re
The Same Base Must Be Used
tail music merchant still car ri es a ~ood pro
Figuring mark- ups mu s t be done on one ot
portion of goods which are not priced nationally
at retail, he must know with a degree of eCr- · two ba ses. [f th e cost pricc is use d as a basis,
both overh ead and gross margin mu s t be fig
tainty the percentage to add in order to obtain
ured on it. If the selling price ·is used as a
his profit. The expense is lar gely contro lled
basis, again must overhead and gross margin
by outside conditions in relation to his sellini'
be figured on that. .\nd, as it is the most con
policy; the profit, to some extent, by compe ti
venient to figure overhead on gross sales, gross
tion, but it is largely within his own control. By
margin should be figur f d on that basis. A rnark
this it is not rneant that a m erchant can obtain
up that is 100 per cent on the basis of Cost is
any profit that he desires, for that is far from
but 50 per cent on the basis of selling price,
the truth, but he can obtain a fair profit if he
as was pointed out before.
knows his business and directs it with the
In the case given hnc as an example, if the
proper degree of efficiency.
dealer figure s with the two different bases he
A Fair Net Profit
will find that in"t ea d of receiving $10,000 for
In the investigation of overhead expense· in
tire goods he will receive but $9,100, and instead
the retail music store,. which The Review ha"
of utaking ~ 1,000 on the g ross sales he will
conducted, the degree of unanimity among the
ha ve made but $100. This shrinkage of 90
dealers reporting, that is, those whose retur·n s
per (('nt in net profit seems alrnost impossible
show that they have proper accounting sys
to happen, but rnore than one small or hap
tems and thus know the fundamentals of their
ha zard dealer has made this mistake to his
business, is remarkable so far as it concerns
sorrow and then wondered what has happene·d
what constitutes a fair net profit in the music
to his net profits.
trade. The figures which they give range be
An Apparently Large Spread
tween 10 and 12 per cent, the greatest number
I t required this digression to show the ap
of them setting 10 per cent as a fair figure ",·ith
parently large spread which exists in the sale
which they are satisfied. This figure places the
01 musical instruments, and which has caused
retail music trad e defin itely among those lines
so many lo sses in ' the retail music trade. De
of retail selling where the net profit is low,
ce(\·ed by the mark -up which does not exist,
especially when the rather slow turnover \\ith
thc dealer in many cases has figured that he
which this trade is confronted is considered.
can spend much more than he really can in
The figure will also be s urprising to many re
exploitation work, with the result that much of
tailers who have never known their margin of
it has bee n ex tra va gant in the sense that it has
profit accurately, for most of them, and their
not yie ld ed re turn s in proportion to the ex
returns to The Review sKow it, evidently con
pcnditure ~ .
If th e dealer will keep his eye on
sider that the net profit they make is appre
net profit rather than on g ross margin he will
ciably higher than this.
['ot be led into these expenditures, provided h e
A False Attitude
li ~·urcs properly.
This attitude of mind has a goo d deal of basis
'vVhen it is considere d that dealers who know
for it, especially in th e piano department. The
state that a fair net profit on the sale of musical
dealer who buys a certain number of piartos and
instruments ranges around 10 per cent; and
makes the tradition a l mark-up feels that he has
when thi, figure is not found to vary widely
a wide margin within which to work. The first
in all clcflartments, unqu~stionably extravagance
basis for this feeling is that, in most cases, he
cannot be c
takes the invoice cost of the instruments as
Here a definition of the term extravagant
the basis on which to figure the percentage of
llla y b e nce ded. Extravagant overheads only
mark-up. Following this practice he appar~ntly
ex is t in r e lation to gross sales. There is nothin g
works upon a 100 per ce nt spread. As a maller
;,bso lut e abo u t thc term; it is onl) relative and
of fact, if he will ta ke lhe sellin~ price a, his
ca n oll l ~: be s o.
/\ dcaler whose overhead
basis, thus followin g lhe mo st modern practi ce,
;. tll ou nt ~ to ;!;SO,OOO a year in actuality may be
hi, spread is really but 50 per cent ,wd that is
runnill ':· hi s bu s inc ss on a hi g hl y economical
all he has to work upon.
ba s i ~ compa re d to ti,e dealer whose overhead
But what differen ce docs it make, the mer
tn a c tual mone) i< but ~5,noo. .\ comparison
chant may as k, since the aillollnt between the
of the over hea d s in relation to the gross sales
cost price a nd the selling price remains the
oi each will soon show it. Here, as everywhere
same, no matter wltich basis may be taken, in
cl,e in business, the economy depcnd s not upon
order to figur e g ross margin? It makes an
thc amount of money spent, but uDon the de
appreciable difference, as he will soon see if
" ree of effic iency with which it is SDent.
he will dig it little deeper into the problem.
Turnover and Net Profit
The way such a merchant im·ariably figure s
. '\ ~ wa s pointed out at the bcginning of thi ~
what it costs him to sell an instrument is to
arlicle, dealer" who replied to The Review's
take his gross volume of sales, divide it int o
ques ti onnaire and whose replies show ed that
the expense he has been under during a g iven
th ey kne\\ the actual fiptres of their ov e rhe ad
period and take that percentage thu s arrived at
in re lation to their sales agreed almost unani
as hi s overhead.
mously that a iair net profit in retailin g- musi cal
Now. let ll S s~e where that brin [!s us . Tf a
in s trument s is 10 per cent. This is cxtreme ly
dealer do es $10,000 g ross sales--these fi g ur es
lo w, w lt e n it is considered that th t turnover
are e ntirel y arbitrary for the sake of example
is s lowed up co nsiderabl y, due to the large pro
at a cost of $2,000, he will figure that his over
portion of in~talment business which is done
head is 20 per ce nt. If he figures that he de
sires to make a ]0 per cent net profit, and the
hy c·v er) retail merchant, and when it is con
s idered that no instalment sale is actua ll y com
!foods cost him $7,000, he will almost invariably
figure that 20 per cent for overhead plus ]0
plete until the final payment is made L1pOn the
contract. A dealer when he sells a piano, for
instance, really makes a series of sales-the
salesman making the [Irst and the collection
department th e r emain ing ones. And this con
dition is what makes the question of proper
financing ,0 important in the retail music busi
ness, for it is only through proper financing that
the ratc of turnov er can be speeded up and
the net profit thus increased. The basis of good
financing, of co urse, a nd the form·ula by which
all financin g must be judged, is whether or not
the extra capital thus obtained yields a larger
r,ite of return when used in the business than
it requires to obtain it. And this must be fi g
ured on the act ual return plus the return re
ceived from the in crease d rate of turnover.
Not the Maximum Rate
Ten per cent, of course, is not the maximum
rate of net profit. By economical and efficient
merchandising it can be increased. But it is
a figure that no dealer can afford to go below,
considering the fact that he has invested his
capital in a mercantile enterprise and that, with
thf inher ent risk involved, he is entitled to more
than ordinary interest.
Once it is established what a fair net profit
the retail music merchant should expect, the
qu estion of overhead as it affects the various
department s in the retail music store and the
proportion that each item in the overhead s hould
be in each department can be considered. That
will be taken up in the next article in tbi s
series.
NEW DEPARTMENT IN CANTON
Wm. R. Zollinger Co. to S'pecialize in H. C.
Bay Co. Grands
CANTON, 0., October 2.-0pcning of a piano
department is announced by the department
store of the William R. Zollinger Co. her e. Th i·s
department wiJl, at the present time, spec iali ze
in the sale of grand pianos, featuring the H . C.
Bay Co. line. The store will soon add player
pianos made by this · same concern. V:. E .
Pyle, manager of the talking ma chi ne depart·
ment, will also supervise the new piano sec
tion, which will be located on the fourth floor
of the store.
This store, up to two years ago, maintained
a large piano department which was managed
by C. E. Jones, now in business for himself in
.\kron.
STEUBENVILLE STORE REMODELED
STEUBENVII.I.E, 0., October 3. Altera ti ons in the
lllusic house of Da v is, Burkham & Tyl er will
be s tarted in a day or two and a complete re
a rran ge ment of that establi s hm ent is contem
plated. The record and s mall goo d s department
will be located at the front of the ground floor
with piano parlors in the rear. In the basement
there will be a large display of phonographs
with a battery of private booths.
H. B. TREMAINE SAILS FOR EUROPE
Among those who sailecl on the S. S. "Levi
o.tha n" for Europe on last Saturday , September
29, was H. B. Tremai ne, presid e nt of the Aeo
lian Co., who will remain abroad several weeks
on business, and also Edwin S. Votey, vice
president of the compan~' , with Nrrs. Votey.
Consult the Universal Want Directory of
The Review. In it advertisements are inse.rted
free of charge for men who desire positions.