The Danger of Seasonality

Having just recently ended the Christmas season and the madness this creates in retail serves as a reminder of how difficult it is to be profitable. This difficulty is even greater when a business has high seasonality.

Competition, Competition, Competition

The first threat to profitability is competition. This can come in the form of better products and services, more products and services, lower prices, faster delivery, and a host of other ways. Not many people consider how seasonality increases the impact of competition, but more on that later.

Will the Selling Season Ever Get Here?

It is not uncommon for retailers to operate at a loss (sometime significant) and with negative cash flow for much of the year, anticipating that the holiday selling season will offset this and make a company profitable and cash flow positive for the entire year. It can seem as if the holiday season will never get here. Some companies are unable to weather the financial problems long enough or obtain sufficient credit to either survive until then or be able to obtain the inventory to sell. Without something to sell there is no profitability.

Then the Sales Must Occur

What if those holiday sales never materialize at the forecasted level? This can be catastrophic. A retailer can be stuck with inventory that will be difficult to unload at prices that provide sufficient margins. What seemed like a sure winner with customers can fall flat and profitability is out the door.

The Sales Are On!

Getting back to competition, how often do retailers find themselves having to offer deep discounts during the prime selling season to get customers in their brick and mortar or online store? In this case seasonality can be a killer to profitability.

What’s the Point?

What I am driving at is the necessity to examine your business model. If you depend on seasonality to become profitable, you have a major risk built into your business model. Think about ways you can make sales more even throughout the year. Rather than find yourself having to dramatically cut prices during the prime selling season, consider smaller sales during the year to help smooth the sales curve over more months. This also serves to keep customers aware of you. At the same time, develop ways to implement cross-sales and up sales to more profitable products. Think about a store that sells electronics or appliances. How often do they ask if you want to purchase an extended warranty? They reason they do is that extended warranties are highly profitable.

If you are a business that depends on seasonal sales to be profitable, what steps can you take to minimize the risk this represents?

If you want to know more, contact AimCFO – Contact

As always, your comments are welcomed.

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