Thursday, June 3, 2010

The True Value of an Item

The true value of an item is determined by how much someone will pay at a specific point in time. There are all sorts of idioms supporting that theory, but, my favorite is, "One man's trash is another man's treasure." I have often wondered what would happen if retail stores operated more like garage sales.

At a garage sale, prices on items are established as a baseline for negotiations. Houses are bought and sold in much the same fashion. The seller expects to be made an offer, so he or she sets the price over and above what he or she expects to receive. In America, we wouldn't think about going into a retail store and negotiating for a pack of cigarettes, a Pepsi, or a new dress. Nevertheless, this negotiation goes on in the buyer's mind with most everything they purchase.

Smart retailers know this and immediately try to control this internal self-negotiation in a myriad of ways. We see it all the time – Sale! Today only! Limit: Two to a customer! and so on and so forth. The perception of 'low price' is more important than 'convenience'. WalMart's famous "Rollbacks" are one example of an attempt to influence the consumer's mind and is no doubt one of the most successful marketing ploys in the history of the world.

When the average consumer enters a convenience store, they often leave their negotiating skills in the car. They know they're going to pay more for items than they're worth, so why bother? In most cases they simply bite the bullet and chalk it up to 'convenience'. That's why we don't see shopping carts in small retail stores. We automatically assume they will leave with only as much goods as they can hold in their two hands.

In our region of the country consumers have trained us to believe that we should expect an average inside sale of only $3.9928 from each and every customer that walks through our door. Simply looking at it from that angle, our only solution appears to be to increase the average sale or increase the traffic count. In other words, if we were drillers in the early 20th Century, we would simply drill as many holes and we could and hope one would strike oil. But, with the advent of computer technology, oil drillers got more sophisticated and increased their level of accuracy ten-fold. Why don't we apply these principals in retail?

The secret to making money in retail is to get smarter. We must manage each and every item in our stores as if it were a tiny, little machine that generates cash. If we concentrate on the smallest common denominators it will result in a mountain of cash. We've seen it time and time again. By making tiny adjustments here and there we can fine-tune our stores so that overall, they will produce the maximum amount of income.

It takes computers to do this. If that tiny, little pack of gum has stopped turning . . . we need to find out why. If a bag of chips is turning but not producing a profit . . . we need to find out why. If an item is turning too fast to produce a profit or one is not turning fast enough . . . we need to find out why. A computer has the time to analyze and affect the smallest, insignificant item in your store, whereas you don't. But, in order to do these things you must have the tools to perform these functions. And the cost of running these tools must be less than the benefit you receive from using them.

As retailers, we must examine every avenue that shows a promise of increasing profits. Only then, will we know for certain that we have done everything possible.

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