- Brian Cassidy
- Sep 17, 2011
- 8 min read
When I began my bookselling career, I worked not in used bookshops but in new (ie. independent bookstores selling new books only). And in that context managers, section buyers (of which I was one), and owners were always watching the store’s “turn” or turn-rate. It is an eminently useful business concept I brought with me when I started my own used and rare book business. But despite its utility, in my experience far too few book dealers understand the idea or importance of turnover for their business. Indeed, as I hope to demonstrate, there are few numbers you can know about your business that are as immediately useful and practical as your turnover.
What is turnover?
Turnover is simply the *ratio* between your total inventory and your items sold. This ration can be expressed either as one between the *number* of items sold and the number of items in your inventory *OR* as the ratio between your total sales revenue and the total value of your stock.
So, if you have on average 1000 books catalogued in your inventory during the course of a year and in that year you sell 350 of them, you have a turn rate of .35. Likewise, if your stock has a retail value of $100,000 and in a given year you sell $35,000 worth of material, your turn rate is also .35.
Put perhaps more simply, your turn rate is the percentage of your stock you sell over a given period, expressed either as a percentage of your stock’s value or volume. So in the two cases above, you are selling 35% of your stock in a given year.
Which ratio should I use?
Both have their uses. The former (ratio by number in stock) lets you know how quickly you sell your inventory. The latter (ratio of value) tells you what kind of return to expect on your investment (ie. your stock). In my experience, these numbers should be roughly in the same ballpark (though they will rarely be precisely the same). If they are not, you may have a problem. For example, if your turn by number of items is 40% and by dollars is 20%, this tells you that are selling more inexpensive books from your inventory, and that your higher-priced material may be languishing.
What is knowing my turnover good for?
After one’s profit-and-loss statement, in my opinion there is simply no more useful number to be looking at than one’s turnover. I’ll elaborate shortly. But briefly, knowing your turnover allows you to:
Know what you can/should be paying for books
Understand how long on average it takes you to sell a book
Examine the overall health of your business
Figure out how to make more money.
Knowing what to pay for books.
Most discussions of what one should pay for the books in one’s inventory almost always seem to to focus on what the ultimate selling price is going to be. And while it is true that what you pay should bear some relation to what the ultimate selling price is going to be, this MUST be tempered by what your expected TURNOVER rate is going to be. VERY roughly speaking, you can pay what your turn rate is, ON AVERAGE. Turning 1/3 of your stock a year? Then that should roughly be your COGS (“cost of goods sold”). Turning less? Then you should be paying less. Turning 50%? Great, then you should be paying more for books (or at least you can…which in theory if you want the better books you should be).
This formula breaks down somewhat at the extremes of the price spectrum: very cheap books and more expensive ones. For cheap books you want your COGS to be as near to zero as possible because your profit gets eaten up mostly by labor and overhead (see my storage example below). And at the higher realms of the business, you can still make a tidy profit on lower margins. But roughly speaking, it’s a useful way to BEGIN thinking about what you should pay.
So, to take two examples:
If someone offered me a book that I expect to be able to sell for say $1000 and I am confident I can sell it in short order (meaning, less than a year), I might offer 40-50% or even 60%. And if I have a ready client for the book, meaning I think I can sell it more or less immediately, I’m happy with a 20% mark-up.
But if someone offered me another book that I expect to sell for $1000, but I think it’s likely to sit for 2-3 years, then my offer is more in the 1/3rd area. And longer? 10-25%.
Now, these examples have you considering the potential turnover of an individual book, but the theory is the same. And likewise with collections. How long do you expect to take to sell the collection (include your cataloguing time!)? Your average yearly turnover should give you a good idea of how long, and therefore of how much to pay.
Why does this formula work? Well if you think about it, it makes sense. If you sell 20% of your stock in a year, then in order to keep generating the same returns to need to replace that value and you should pay about 20% of what you expect to make. Otherwise your profits shrink. And if you pay too much more, eventually you will encounter serious cash flow problems.
A word of caution: remember that paying more for inventory will not in and of itself increase one’s business. If you’re buying largely the same quantity and quality of books and all you are doing is paying more, you are simply decreasing your profit. But if you are spending more so as to grow the overall value of your stock, then ultimately you should see an increase in revenue (and profit). So for me, my book buying budget is typically COGS plus 10%. This should, if I’m buying well, replenish the value of what sold AND grow the value of my stock, which will increase revenues and hopefully profit without needing to increase turnover. In other words, one can certainly SPEND more to grow your business, but what those books COST you should remain largely constant and should bear some relationship to both what it will sell for and what your turnover is.
And finally before moving one, these are rules of thumb and there are all kinds of legit reasons to deviate from them. I often pay more than I might care to for prime material or for something unique or if I think the seller might have other things I could want…Or if I think something is wicked cool…Or if its from an established customer who has done a lot of business with me.
And I can pay less too: for books I know are salable but which I don’t personally care for…Books that I hate cataloguing…Books that require extra labor…Books I had to travel for…Collections with large amounts of filler I will need to dispose of…
Understanding how long it takes for books to sell.
Pop-quiz! You are being offered a collection of 1000 books. Let’s say they have a retail value of $10,000 (average of $10/book). Unfortunately, like most booksellers, you are completely out of room for these books in your house/shop and your long-suffering spouse insists that if you buy them you will have to procure storage for them somewhere else. You have an average yearly turn rate of 25% (both by dollars and units sold). Should you buy the books? And at what price?
Well, if your turn is 25%, given the previous rule, you should offer $2500, right? But wait, I hear some protesting, if these are largely $10 books, they are rather ordinary most likely and perhaps a lower offer is in order. After all, these are books that we’d expect to find in multiple copies already available online. Good thought. In fact, the seller is anxious to sell and offers you the lot for $500 or $.50 a book! A steal right?
But wait: how much is storage going to cost you? Let’s say you only need a small space, something you can find for $150/month or $1800/year. Again, should you buy the books?
Well, with a 25% turnover, it’s going to take you 3-4 years to sell most of the books (though not all). So after three years your P/L on the lot would look something like this:
[$7500 gross revenue, approx.] – [$5400 storage rent] – [$400 COGS, approx.] – [$1500 commissions and expenses, approx.] = $200 profit.
Not so good after three years and having to ship 750 books. Even if you can catalogue, process, and ship 20 books an hour (and I can’t), that’s less than minimum wage.
So again, at what price should you buy the books? Well, in this example, you shouldn’t even accept the books as a donation. Not unless you can either: a) increase your turnover and/or b) eliminate the expense to store them. But these are judgements one can’t intelligently make without knowing one’s turnover.
Understanding the health of your business.
Let’s say last year you grossed $50,000 and this year you are on target to gross $60,000. Your business is growing and healthy, right? Well, maybe. It depends. Your business has grown by 20%. But looking at your numbers you realize that you have catalogued 30% more books last year than the year before. And by focusing on cataloguing better books, the value of your inventory has grown by 35%. So to recap:
Your revenues are up 20%
The number of books you have online is greater than the previous year
And the total value of your stock is also up this year over last
Great right?
Well, yes and no. Notice that your turn rate and your revenue growth are out of synch by a factor of almost 50%. So though both the size and value of your inventory have grown, your turn rate has fallen. Let’s make these numbers more concrete:
LAST YEAR:
RETAIL VALUE OF STOCK: $150,000
REVENUE: $50,000
TURN: 33.33%
NUMBER OF BOOKS CATALOGUED: 10,000
THIS YEAR:
RETAIL VALUE OF STOCK: $202,500 (+35%)
REVENUE: $60,000 (+20%)
TURN: 29.62% (-12%)
NUMBER OF BOOKS CATALOGUED: 13,000 (+30%)
Had your turnover not fallen, your revenue would have been $68,000. In other words, you are not earning a return commensurate with the improvements you’ve implemented. So if cataloguing all of those extra book meant work more hours, you may have actually earned less per hour one year to the next. Or put yet another way, your falling turnover has cost you several thousand dollars.
Your turn rate is therefore potentially a symptom of a problem worth investigating further. Perhaps in focusing on cataloguing more titles, your descriptions suffered. And with lower quality descriptions, buyers are choosing your wares less often. Notice as well that should this trend of lower turnover continue, you eventually will need to keep adding more and more titles simply to maintain revenues. You can see from this example that even in the face of growing revenues and profits, without knowing one’s turnover a symptom of a larger problem can go unrecognized.
Make More Money.
Here’s a handy formula:
[(total retail value in dollars of your inventory) * (average yearly turnover)] – (average yearly expenses) = Income
If you want to give yourself a raise, if you want to make more money this year than last, how do you do it? Well, many people might think: sell more. But that’s not exactly true (indeed, notice that there is no “sales” or “revenue” variable in the above formula). To make more money, you really have only three options. They are: increase the value of your stock, lower your expenses, or increase your turnover. And of the three, the latter is probably the most immediately implementable.
For example, suppose you have a book for which you paid ten dollars. You can price it very competitively at $60.00, or at a more average asking-price of $85.00. Assume that at $60.00 the book should sell within six months and within a year at $85.00. Which should you do? Assuming you have reasonable access to similar books, you should probably do the former. Why? Because you can take that $10 cogs and use it to buy another book to – hopefully – sell in six months for $60. In a year, the two situations look like this:
$60 x 2 – $20 (cogs) = $100 profit $85 x 1 – $10 (cogs) = $75 profit
In other words, you’ve made 33% MORE in the same amount of time and with the same amount of capital by pricing with an eye towards fast turnover. The numbers and assumptions change, and the theory can be taken to idiotic and self-defeating extremes (read: penny-sellers and auto-repricers) but the principle remains the same: turnover, turnover, turnover.