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June 24, 2017

How to Cut Prices, but Stay Profitable


I’m sure you see this as much as I do: Walking through an antique mall, you spot a booth displaying a hand-written sign that reads: “Everything in this booth 25% off!” What’s your impression when you see this?

A) It’s a desperate move to raise cash.
B) It’s just a sale.
C) The booth is going out of business.
D) The operator has no overall financial plan.

My first impression is always (A). Putting everything on sale at such a steep discount is never a good move if you intend to stay in business.

New mall dealers often find themselves in such a dilemma: They rented a mall booth, bought some inventory, displayed it as best they could, and waited for those monthly settlement checks. In theory, it was to be a perfect part-time business. Then came the dreaded day when sales didn’t cover expenses. When that happens several times they panic and put everything on sale. To paraphrase Ray Kinsella’s Field of Dreams, “they built it and they (the customers) didn’t come.”

A quick look at the chart below will reveal why deep-discounting your entire inventory is a bad move. These same principles apply to larger retail stores; just adjust the numbers to suit your circumstances.

jordan-chart

I’ve set up the chart based on the fact that most antique dealers use 2X benchmark pricing. In other words, they set their retail price by doubling what they paid for an inventory item. (I don’t think that this is the best way to set retail prices, but you would be astounded how many dealers believe that this is the proper way to do it. For a review of my pricing philosophy, see the April 2013 edition of Behind the Gavel (BTG) “Anchoring, Bundling and Bracketing: Proper inventory pricing has nothing to do with ‘fair value’”.

As a baseline, let’s say your plan calls for selling $3,000 per month. At a 2X markup, you paid $1,500 for the inventory you will sell. The amount you paid for your inventory (cost of goods sold) doesn’t change no matter how much you sell the items for. Also, I’m assuming that unit sales will remain the same (they probably won’t, but I have to keep my example understandable). With monthly expenses of $750, your plan indicates that your net profit will be $750 (which is an unusually good return based on used merchandise benchmarks; see February 2016 BTG “Benchmarks: Seeing how your 2015 measures up”. Your operating expenses also remain the same regardless of the sales level.

You’ll see right away that if all your sales are made at a 20 percent discount, you will suffer an 80 percent reduction in net profit. To achieve the $750 indicated by your plan, you will have to sell five times as many units as you would have to sell at full price. If you aren’t making sales, how can you reasonably expect to increase unit sales by 500 percent?

At a 25 percent discount, all your profits go down the drain. You’re breaking even. At 30 percent discount, you’re losing money. At 50 percent discount, you’re losing money big-time. At that level, you’d be better off to empty your booth and put everything in storage.

A retailer’s dilemma, then, is how to discount enough to keep the merchandise moving, but still produce a reasonable profit. Running a successful retail business is a lot more complicated than it seems at first glance, regardless of the size of the operation. If you’re new to the trade I suggest reading as many books on the subject as you can, and taking a few small-business courses. In the meantime, though, here are a few quick fixes:

• Don’t use benchmark pricing. Mix-and-match your pricing strategies. Your inventory items are not all alike, so don’t treat them that way. Some items are more desirable than others. Charge what the market will bear; sometimes that may be 10 times what you paid. If you can’t reasonably expect to get at least three times what you pay for an item, don’t buy it. If you’re not sure what the market will bear, check the item on eBay’s “sold” item search. By employing a variety of pricing strategies, you can keep your average profit margins at the desired level and still have some deep discounts.

• Pay attention to your displays. You’d be surprised how much good signage and lighting can improve sales.

• Display similar items close to each other so that browsers can easily compare value.

• Don’t put everything on sale at once. Begin by discounting older inventory. Always have some items “on sale” even if you are a new dealer.

There must be a reason to offer a discount, and customers must believe that the reason is valid. Group “on sale” items together so that browsers can quickly see where the bargains are. Post a sign telling why the items are on sale. Don’t use a hand-written sign; hand-written signs scream “amateur”. (If you can’t afford professional signage, buy some decorative-border printer paper and use your computer). Remember, “over-stock,” “clearance” and “liquidation” are valid reasons to have a sale.

If you find yourself buried in old merchandise and forced to move it regardless of price, then do what needs to be done; don’t become emotionally attached to your merchandise. An inventory portfolio, like a stock portfolio, will contain money-makers and money-losers. What you’re looking for is a good return on your overall investment.

A productive mindset is to think of your inventory as a whole rather than as a collection of individual items. Shoot for a high average return.

Markdowns are an essential part of retailing, and doing it correctly is essential to profitability. Done incorrectly, it can kill your business. Consider markdowns to be (in baseball terms) a bunt. Why do coaches call for a batter to bunt? They do it in order to move a runner into scoring position. A coach knows beforehand that the bunting batter will likely be thrown out at first base, but it’s the price he pays for moving a runner into scoring position. It’s called a “sacrifice” play. When you take mark downs, you are sacrificing some of your inventory in order to free up cash to buy items that will sell faster or perhaps be more profitable. In the end, you’ll put your business in a better position by correctly taking markdowns.

This article was previously published in Antique Trader Magazine

Originally posted 2016-09-11 11:00:33.

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About Wayne Jordan

Wayne Jordan is a Virginia-licensed Auctioneer (#3481), as well as an AIA and CAGA Certified Personal Property Appraiser.

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