Thursday, June 3, 2010

Finding the Perfect Price

You can sell anything if you put the right price on it, and that doesn't always mean the lowest price.

For example, if I put my JC Penny watch on sale for $50,000, I most certainly will not have success. If I price it at a penny, I won't have much better luck, because potential buyers will suspect it's worthless; and even if I did sell it, I would lose any profit I might have realized in the sale. So in this case, somewhere in between a penny and $50,000, lies the "Perfect Price".

Finding the perfect price on a single item is difficult if not impossible. But, if I have multiple copies of the same item for sale, it's not that hard.

If I have the manufacturer's suggested retail price, that's a good starting point, but nowhere near accurate. Finding out what others are selling the same product for would be more accurate but, time consuming. I could put together a focus group and find out how my potential customers rate the value of the product, or I could simply inquire of my employees and friends.

The problem with determining the perfect price is more complicated than that. The value of an item also depends on the time of day, day of the week and even the season. The value of an item at 7 AM might not be the value of the same item at 2 PM. We sell more ice in the summer than we do in the winter, and beer sales go up as we approach the weekend. And oh yes, the perfect price may vary from one neighborhood to another.

Yet, unless we make an effort to identify the best possible price at a given point in time we are losing money. How much money? I suspect a lot!

The 'perfect price' is defined as the retail price placed on an item to create the greatest overall profit. Neither the margin nor the price itself has any meaning unless we consider 'turns' in the equation – margin, times zero turns, is still zero.

The retail price is like the gas pedal in your car. You can push it all the way to the floor and lose so much fuel efficiency you won't make it to your destination no matter how fast you travel. If you don't push it down far enough, you will get there too late to do whatever it was you were going to do there in the first place.

We will make more money if you sell ten occurrences of an item at $1 profit each, than if we sell one item for $9.00 profit. This is critical in understanding how to maximize profits in a retail store.

In one of my post I used the example of honey buns, saying that from the hours of 2 PM to 4 PM honey buns are just sitting on the sale's floor occupying space, and if you dropped the retail price during those times and notified your customers, you would most certainly sell more of them.

I will use the example of Little Debbie Honey Buns selling in one of our customer's stores right now. They have a retail price of $0.75 with a profit of about $.27. The store is selling 5.4642 a day. That's $1.4753 per day in gross profit. Hardly seems worth the effort, right? Well of course it is, because we are talking about pennies here, and if we thought that way, we probably wouldn't be in the business. So when we talk of small figures like this, we must remember that it's the profit from thousands of little items like these that allows us to keep our doors open.

If we were able to drop the price of those honey buns between 2 PM and 4 PM to $.58, and advertise it as such, we might be able to sell five more in the course of a day and realize an additional daily gross profit of $.50. That adds up to $182.50/year in overall additional profits. Do that with only 3% of the items in a store and it comes to a whopping $16,425 a year that we would not make otherwise. Do that in eight stores - $131,400.

If you are trying to apply this way of thinking to your current technology it might be difficult. You must have an environment where you can adjust your prices from a central location and monitor the results. I would be happy to show you how to do things like this with the technology we have developed over the past decade. I believe it's crucial to the survival of independent retailers.

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