Starting a tobacco shop isn’t easy. In the face of rising inflation and economic uncertainty, many would-be tobacco entrepreneurs wonder, “Is a tobacco shop profitable?”
The short answer: yes!
Unfortunately, the long answer is a bit more complicated. The tobacco store industry is extremely competitive, and not all stores are guaranteed to succeed.
However, by leveraging the right technology and taking a strategic approach to your products, marketing, and customer service, tobacco store owners can expect to take home healthy profits and grow their business.
In this article, we’ll cover what a typical tobacco shop profit margin looks like along with six key considerations that stores should keep in mind to boost sales and improve customer satisfaction.
What Is a Healthy Tobacco Shop Profit Margin?
Profit margins for tobacco shops vary depending on business size, tax rates and laws, and location, but an average tobacco store can expect to earn profits between 20% and 40%.
For a tobacco shop bringing in $300,000 a year, that equates to profits between $60,000 and $120,000.
Related Read: How Much Does It Cost To Open a Smoke Shop? 6 Factors That Impact Costs
To calculate your shop’s profit margin, use this equation:
Important note: When considering a tobacco store’s profit margin, it’s important to not just look at the overall number.
Instead, use your point of sale (POS) system to break down profits by individual items, product categories, suppliers, and more. That way, you can hone in on the products contributing to your success and find areas for improvement.
Is a Tobacco Shop Profitable? 6 Key Aspects To Consider
If you want to ensure your tobacco shop is profitable, here are six key considerations to keep in mind.
1. Product Selection
A unique product list is essential for standing out from the competition and keeping people coming back for more. Focus on offering a mix of staples (e.g., cigarettes, disposable vapes, lighters) and specialty items (e.g., hand-rolled cigars, reusable vape pens, CBD products).
However, having a great product lineup isn’t the same as having more products. If you expand your selection too quickly, you might waste money on items that no one is interested in.
Instead, be strategic and use technology to create a list of products your customers will love. Use your POS system to see which products consistently sell the most, then expand in those areas first.
To try out new products with less risk, you should also consider participating in a tobacco scan data program. These allow you to sell new items at a promotional rate in exchange for sharing sales data with the product manufacturer.
If you’re interested in participating in a tobacco scan data program, ensure your POS system can log and export the right type of data.
2. Customer Retention Strategies
Getting new customers in the door is great, but keeping them coming back is essential. Every time a customer buys something from you, they’re more likely to return — and some studies estimate that a repeat customer may spend 67% more than a new one.
In other words, retaining customers is more valuable than attracting new ones. Here are a few reliable customer retention strategies to make your tobacco shop profitable.
- Customer loyalty programs: Introduce a loyalty program or membership in your store. You can attract repeat customers with exclusive offers and points for purchases.
- Regular discounts: Create discount days or repeat offers that tempt customers into a repeat visit. For example, you could offer a “buy two, get one free” offer for vape refills every Friday.
- Marketing and newsletters: Use your customers’ contact information to send them information about new products, staff recommendations, store news, and more.
- Personalized offers: Use your customers’ sales history to segment them into groups (e.g., customers who primarily buy vape products) and tailor unique offers for those segments.
The best tobacco store POS systems come with these features built in, allowing you to build relationships with your customers without expensive new software.
3. Customer Service
Even a store with a fantastic selection of unique products won’t stay profitable if it feels unwelcoming.
Hiring and retaining good employees is worth its weight in gold. Ensure employees greet customers and are knowledgeable enough to provide recommendations and quickly find items.
As budgets tighten, customers are more hesitant to splurge on items they’re unsure about. This can be bad news for small tobacco shops. However, a knowledgeable employee can help drive sales by making customers more confident in their purchases.
Beyond creating a stellar customer experience, engaging with customers is also an effective theft deterrent. Would-be shoplifters will be less likely to try something if they know they’re being watched.
Related Read: Protect Your Business With These 7 Tobacco Store Security Ideas
4. In-Store Events and Smoking Areas
Another way tobacco stores can boost profitability is to become a social hub for smoking enthusiasts. There are a few ways you could go about this.
First, if you have the space (and local zoning laws allow it), you could set up a cigar lounge or smoking room. You’ll sell more cigars and other high-quality items and boost revenue by selling snacks, drinks, and more.
You could also pair your customer loyalty program and smoking room by charging for different membership tiers that provide exclusive access to discounts, member-only seating areas, and more.
If you don’t have the money or space to set up a permanent lounge, that shouldn’t stop you from bringing customers together. Host in-store events such as product launches, educational nights, cookouts, and more to show off your expertise, talk with customers, and spread brand awareness.
5. Pricing Strategy
Whether your tobacco store is profitable will depend on how you price your products — especially when you account for competitors, inflation, and other economic factors.
While looking at a competitor and undercutting them might be tempting, this probably won’t help boost profitability. Blanket price increases might boost profits in the short term, but could drive customers into the open arms of the competition.
Instead, adjust prices strategically, taking a data-driven approach. Use the analytics and reports on your tobacco store POS system to discover:
- Bestselling Items: Understand which of your products consistently sell well and how much profit they make. Remember, even if you sell a lot of a certain item, its profit margin may still be thin.
- Bestselling product categories: Use a system that includes auto-ranking to quickly break down which types of products lead to more sales.
- Cost of goods sold (COGS): Understand how much it costs to acquire inventory vs. the amount you sell it and whether you’re getting a good deal from your suppliers.
By making decisions based on data instead of a hunch, you can effectively price items and maximize profits.
6. Demand Forecasting and Optimizing Inventory
As a retailer, optimizing your inventory levels is the bread and butter of maintaining healthy profits.
Understocking might save you money, but it could drive customers away if you’re out of their preferred brand. On the other hand, overstocking could result in wasting money on inventory sitting in storage, forcing you to offload it at a discount.
An inventory management system will help you avoid these scenarios by giving you a real-time view of stock levels. Once you know how quickly certain items move through inventory, you can set low-stock alerts and use automated reorders to make sure you always have the right amount in stock.
Another key aspect of maintaining the right inventory level is demand forecasting. This method combines historical sales data with other factors (e.g., holidays, days of the week, seasons, local events, etc.) to find trends.
For example, if you operate in a college town, you might see consistent sales spikes around game days or campus events. By knowing this in advance, you can order more stock of trending products and bring in more staff to keep things running smoothly.
Make Your Tobacco Store Profitable With Cigars POS
Is a tobacco store profitable? The answer is a resounding yes if you use the right tools and make smart decisions.
However, making strategic decisions for your tobacco shop without visibility into its performance is like steering a car blindfolded. It might work for a little while, but a crash is inevitable.
Cigars POS is specifically tailored to the unique challenges faced by tobacco shops, vape shops, cigar lounges, and more. With a suite of user-friendly features backed up by a team of tobacco retail experts, we’re dedicated to giving small tobacco stores the tools they need to stay profitable and stand out against the competition.
Schedule a customized demo today to see how Cigars POS can help your tobacco shop find long-term success.
