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Jim Green's blog

For New Buyers #8

April 5, 2012

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.

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