Just to be clear on "small profit margins"...the dealer price for bikes pretty much is on par with other hobby/luxury items (think home theater electronics, musical instruments, etc.). Think 50%-60% of MSRP, it varies a little by manufacturer and also during special times of the year where the dealer may be able to get even cheaper pricing by buying from a factory overstock or other special promotions, which can result in higher profit margins. Now I understand they have to pay rent, utilities and employees. But let's not kid ourselves into thinking that there are running tiny profit margins. It's in their interest to move as many bikes as they can at all price ranges, sub-$1000 to five figure bikes. And you should tailor your business and test ride model around the differing needs of each demographic. Someone coming in to buy a $700 bike is likely going to have a different set of things they'll expect from your shop as someone looking at a $5K+ bike.
The ones that I've seen stay in business and have the most fans in the So-Cal cycling community are 1) customer oriented, 2) allow test rides, and 3) cultivate the customer base. Offering small to medium discounts doesn't hurt either, I'm not talking internet clearance prices, but 10-20% still maintains a profit margin especially on high-end bikes while also making the customer feel like they got a deal. Sure I may go in and test ride something and not buy today, but if I had a good experience, you'll definitely land on my short list of places for my next purchase, and that purchase is likely going to be over $4K. Meanwhile I'm also going to be recommending your shop to any friends and family that are looking to get into cycling, even if it's for a kid's bike. I'll steer them from Wal-mart and into your store.