December 5, 2022

Small Business Advice

Revenue Per Square foot

Jerry Osteryoung | 10/29/2007

The power to question is the basis of all human progress.
— Indira Gandhi

Utilizing your space in your business is so critical. This is especially true in retail but all businesses need to take this into account.

We are dealing with a firm that is considering renting some additional space. In part of their store they rent out computers and they just cannot meet the demand. The computers are used during every hour the store is open with a waiting list of about 10 people, sometimes, ready to rent a computer. The annual rent cost of this new space was going to be $25 per square foot.

When we did some further computation, we found out that the computer rental part of the store did about $100 of revenue per square foot. However, in the other part of the store, and they were in very crammed quarters, they were averaging $400 per square foot. Obviously, if they needed to expand, they did not need to do it for more computer space as they could get a much higher yield, with other uses. They just confused excess demand with profitability.

Apple stores, believe it or not, has sales per square foot of $4,000 as compared to Best Buy which has $1000. Tiffany’s has about $2500 revenue per square foot.

What revenue per square foot tells us is, how effective the firm is using the space it has. Most of the data collected on revenue per square foot is related to retailers who are so conscious of this cost. To a retailer, this cost represents the intrinsic value of any locations as compared to other locations. Additionally, when you compute revenue per square foot you must include all areas even bathrooms as they are part of the cost that you are paying for.

While retailers use this parameter, so many other firms need to think if they are using their space to the best they can. Another firm was selling its excess low moving parts inventory in an area of their business. When the entrepreneur computed the revenue per square foot for these parts he got $25 and immediately decided that he did not need to be in this business any more and sold off all of these parts to another firm. He now used this area for storage of some of his primary products that he was currently paying rent for storage off premises.

One very helpful thing is compute the revenue per square foot of each portion of your business to compute how efficiently you are using your space. Most firms find products or services that are just not covering their cost of the space. Space is like any other asset an entrepreneur has under their control and it must be looked at very carefully.

Now go out and look to see how you are using your space on revenue per square foot.

You can do this!

Jerry Osteryoung is the Jim Moran Professor of Entrepreneurship in the College of Business at Florida State University. He is also the Director of the Entrepreneurship Program at FSU and Executive Director of the Jim Moran Institute of Global Entrepreneurship. He can be reached by e-mail at jostery@comcast.net or by phone at 850-644-3372.

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