For New Buyers #8
In most retail furniture companies, buyers are guided by budgeted gross margin objectives on each category of merchandise for which they are responsible. Generally, to continue in their jobs, they are bound to achieve the objective. Pricing merchandise for sale to consumers can be very cut-and-dried or can require significant consideration, review, and intuition.
Formulaic Pricing or Pricing for Profit
Formulaic pricing is pricing by some formula. For instance, a buyer might price each item at the budgeted gross margin percentage plus a predetermined percentage to allow for freight, damage and final liquidation markdowns, sales promotion markdowns, etc. Simple enough. An item costs $100, GMP objective is 45%, 10% of retail price for allowance, retail price will be somewhere around $209. This methodology, in my view, does not allow for maximum profitability. I believe the better alternative is in what I call ‘pricing for profit'. Simply stated, it amounts to looking at an item without first knowing the cost. The buyer may wish to instruct the sales rep not to disclose the cost until the buyer is ready. The item is then evaluated using three measures. 1.) At what retail price would the item likely sell in great quantities if promoted? 2.) At what retail price would the item likely sell well as a basic in the assortment? 3.) At what retail price would the item likely not sell?
At this point the buyer would learn the cost and determine whether the item is right for the assortment (assuming it is a line-up need). Clearly, if the item is likely to sell in great quantities and it meets or exceeds margin requirements, the item should be added to the assortment. If the item will sell well as a basic and the cost is at the margin requirements it may or may not be bought. The buyer may choose to retail the item at a much greater retail price and margin if he/she feels the item will support the price. If it exceeds margin requirements it will probably be added because it can be both a basic at a higher margin and be a promotable item at the required margin. If it is at or near the price it will likely not sell then, obviously, it won't be bought.
The principal I am trying to put forth is that merchants should think ‘RETAIL' first and cost second. Greater profitability may be the outcome.
If your company employs new buyers or buyers that you would like to see become more effective, I can help. Email me at furnindustry101@aol.com or call me at 727 347-1201.
Next Post: Bedding...An Impulse Item?
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DC commented:
This article is good. It points out that there are several ways to earn profit and stay in business. I have had a retail customer for 18 years and his way of pricing is to earn $300 per sofa. He turns more, therefore he earns more. It works for his area. He has been in business for 40 years. It won't work everywhere, but just as Jim's article states, Greater Profitability may be the outcome.
Jim Green commented:
Dear Frank:
FYI I 'did' for a great many years and very successfully. Most of the buyers I trained were also successful. Perhaps you didn't quite get my point which was to think retail price rather than wholesale cost in determining whether an item fits into a line-up. This will yield maximum margin.
But thanks for your input even if it was pretty virulent.
Matt commented:
I wouldn't really say the story is "moronic", nor would I classify his buying approach as idiotic. He just doesn't swing at the ball the same way you do, It doesn't mean he still doesnt hit it. I'm guessing sales are slow?
frank commented:
This article is moronic and your approach to buying is idiotic. I would never send buyers to "learn" from you. The old saying goes, "Those who cant do teach" . Perfect example.
Jim Green commented:
Well said in many fewer words. Thanks
Ricky commented:
Good article. I think alot of buyers could or should determine the retail price within a matter of seconds of seeing the product. Then after hearing the price, determine if their market can make the product work at a price that makes sense. Sometimes the objective is to make a little more money, sometimes your objective is to achieve "value" in the customer's eyes. ie, lost leaders
