How to Conduct a Retail Cost Analysis in 6 Steps

Are you seeing your sales numbers climb but not seeing a corresponding increase in your bank account? That’s because hidden costs are draining your profits. The average retail employer cost per staff member is $25.89 per hour, and business insurance averages nearly $3,000 per year. 

Retail cost analysis involves identifying, organizing, and evaluating all costs involved in running an ecommerce or retail business. You’ll uncover where your money goes, as well as how to price your products properly, hold the optimal amount of inventory, produce cost savings, and control your cash flow.

This guide shares the key components of a retail cost analysis, with a step-by-step guide on how to conduct one for your business. 

Key components of a retail cost analysis

Cost of goods sold (COGS)

Cost of goods sold (COGS) includes all the direct costs of producing or purchasing the products you sell. This might include:

• Wholesale costs for purchased products
• Manufacturing and labor costs to produce products
• Raw materials
• Packaging
• Shipping to your retail store or warehouse

For example, COGS for a candlemaker includes wax, wicks, fragrances, jars, lids, labels, shipping costs to receive these raw materials, and the labor required to assemble them.

Operational costs

Operational costs include administrative business expenses that aren’t directly tied to the production or purchase of goods. You might see these referred to as overhead costs, indirect costs, or operating expenses on your balance sheet.

• Fixed, such as rent, storage, staff salaries, or insurance costs.
• Variable, such as marketing and promotional expenses, sales commissions, and payment processing fees.

Inventory costs

Storing inventory comes with its own associated costs, such as storage fees, insurance, depreciation and obsolescence, and inventory shrinkage due to theft, damage, or loss. 

Holding inventory cuts into your bottom line and ties up cash you could use for other purposes. Reviewing your inventory costs helps you avoid cash-sapping overstocks and further fine-tune your purchasing.

💡Tip: With Shopify POS, your inventory syncs automatically across all channels, so you never miss a sale or accidentally double-order. This means less dead stock, fewer rush orders, and happier customers, while also experiencing:

• 16% lower ongoing costs.
• 25% lower annual software subscription and maintenance costs.
• 27% lower annual middleware costs.

Pricing and discounts

Pricing decisions are at the heart of cost analysis. When setting or adjusting prices, consider:

• Competitor pricing
• Customer willingness to pay
• Discount strategies (e.g., BOGO, seasonal markdowns)
• Customer loyalty programs

While discounting can boost short-term sales, it can also lower profitability. If used too frequently, discounts may lead customers to expect sales, reducing full-price purchases and devaluing the brand.

Why is retail cost analysis important?

Retail is often a game of thin margins. Slight changes in your costs can have a major impact on your profitability. 

Here's what a retail cost analysis enables you to do, with examples:

• Identify high-cost products. A home goods boutique sells a line of handmade ceramic mugs. They look great, but between high shipping costs and breakage during delivery, your profit margin is barely 5%. Meanwhile, tumblers (which are purchased wholesale and are easier to ship) yield a 45% margin. Retail cost analysis shines a light on those low-performing products so you can phase them out or negotiate better terms.
• Improve pricing strategies. You price your handmade candles at $25 to be price-competitive. But after completing a cost analysis, you realize your cost per unit (materials, labor, packaging, and shipping) is $18. With a 28% margin, you’re barely covering overhead expenses. Knowing this lets you reprice to $30 or introduce a bundle that boosts order value without sacrificing margins.
• Reduce waste and overstock. Imagine you sell seasonal fashions, and last year’s summer inventory still sits in your stockroom. A retail cost analysis shows you’re losing money on storage and insurance. By studying inventory turnover rates and holding costs, you can order more accurately next season and avoid costly surpluses.
• Forecast cash flow and plan for seasonal fluctuations. By analyzing costs and identifying when your spending peaks (e.g., inventory orders in September and seasonal hires in November), you can manage cash flow more effectively, ensuring you have enough cash and inventory to meet customer demand in the busy season without overextending during the slower quarters.

How to complete a retail cost analysis

1. Identify all costs

Start by listing all the costs associated with your products. Don’t just focus on the obvious ones—dig into hidden operational costs, too.

It helps to categorize your costs into the following groups:

• Direct costs, such as product materials, packaging costs, and shipping fees.
• Indirect costs, such as customer service wages, rent, and retail campaigns.

2. Calculate the cost per unit

Divide your total costs by the number of units sold or produced to calculate your cost per unit. This helps you decide if your selling price is high enough to cover all costs and still leave room for profit. For example, if you produce 1,000 pairs of earrings for $5,000, your cost per unit (per pair of earrings) is $5.

3. Analyze cost structure

Look at the breakdown of your total costs. What percentage is for salaries and wages? Inventory storage? Packaging? Visualizing your cost structure helps you identify areas for improvement or potential automation.

Suppose you run a gift shop and introduce a new line of custom journals. After a few weeks, your POS report shows that even though they're selling well, the cost to produce the journals is squeezing your margins. You can quickly test a new price point or adjust packaging to bring margins back in line, all without waiting for a quarterly review.

4. Compare costs to revenue

Subtract your cost per unit from your selling price to calculate your gross margin. If you’re selling candles for $15 each and your cost is $9 each, for example, your gross margin is 40% ($6 ÷ $15). That means you keep 40% of your selling price to cover overhead expenses.

Between 30% and 50% is a good profit margin for retailers, but this can differ depending on your product, location, and industry. For example, apparel stores typically have lower margins (between 4% and 13%), while grocery stores often operate below 5%.

5. Evaluate pricing and discount strategies

Take a harsh but honest look at how your pricing and promotions impact profitability. Are you using discounts as a bandage for slow sales? Are your high-ticket items carrying your business?

Try running scenarios like:

• What happens to profit if you increase prices by 5%?
• How do discounts affect customer lifetime value (LTV)? 
• How does pricing affect churn in loyalty programs or subscriptions?

💡Tip: If you’re apprehensive about changing prices and seeing sales plummet, use a predictive analytics tool. This technology uses machine learning models to digest large data sets—such as sales history, market trends, weather patterns, and inventory analytics—to forecast potential outcomes without risking sales. 

6. Monitor and adjust costs

Retail cost analysis isn’t a one-and-done project. Set a schedule to review your costs quarterly or monthly. Use what you learn to adapt your strategies in real time—whether that’s renegotiating terms with vendors or adjusting pricing for new trends.

Let’s say you’re running pop-ups, online sales, and in-store promotions. You might assume your website drives most of your revenue, but Shopify POS reveals that your in-person pop-up events generate higher average order values and more repeat customers. With that information, you can shift marketing dollars or staffing accordingly to boost profits.

Shopify POS also lets you track sales by employee, so you can see who’s driving the most revenue per shift. If Sara’s Saturday shifts consistently outperform others, you can structure your schedule to match top performers with peak shopping times, helping reduce labor waste and boost sales without additional operating hours.

💡Insight: Retailers using Shopify POS observed an average annual GMV boost of 0.5% by reallocating staff efforts from data unified in the commerce operating system.

Retail cost analysis tools

You don’t have to build spreadsheets from scratch or be a retail math whizz. These tools can help run a retail cost analysis:

• Profit margin calculator: Quickly assess if your product prices are turning a profit with this tool, which shows the percentage markup and gross margin for each piece of inventory. 
• Shopify POS: Oversee inventory levels across locations, track supplier purchase orders, and identify top-selling products with Shopify’s inventory management system. This unified commerce ecosystem delivers approximately 1% improvement in annual GMV through integrated inventory management.
• Fathom: Cash flow forecasting, management reporting, and financial analysis customized to your business. Fathom integrates with QuickBooks Online to provide you with dozens of financial KPIs, like analysis of deviations from historical trends and scenario-based cash forecasting.

Lower your retail costs with Shopify POS

Retail cost analysis isn’t an exercise in number crunching. It’s about taking control of your company's finances. Understanding where your money goes means you can price confidently, cut waste, and boost profitability.

With Shopify POS, you’re not only tracking sales—you get real-time reporting on margins and inventory movement. It’s the tool that brings your retail cost analysis to life so you can make faster decisions to protect your bottom line.