Friday, September 10, 2010

The Importance of Price Control

If you've been following along, I think most of you will agree, the key to increasing profits in your store is to increase profits on the items you sell. This involves 1)getting more 'valued' customers to shop in your store, 2)using 'specials' and 'deals' to bring an aura of excitement to the shopping experience, 3)having happy and helpful employees who greet your customers and make them feel welcome, and 4)the rather complicated process of effectively raising and LOWERING the margins on each and every one of those tiny little machines that generate cash. To borrow a phrase, you can't row a boat without making waves.

I talked more about how we do that in previous blogs, but first you have to switch your brain away from Category Management thinking to Item-Level thinking, else it will be difficult to understand in this new way.

Let's start by revisiting the Category Management (CM) environment. For one thing, CM is not working in today's market. Convenience store retailers have experimented with breaking their categories (or departments) into smaller and smaller pieces, creating sub-categories within major categories, like 'Groceries' or 'General Merchandise'.

Under 'Groceries' they may want to track 'HBA' separately from 'chips', and 'energy drinks' separately from 'drinks', etc. It's been my experience that operators dream about dividing their categories into smaller and smaller pieces so they can track them in an effort to maximize the profit in the overall categories.

One of the problems with creating these new sub-categories where employees are not scanning, they will find it difficult to recognize an 'energy drink' from a 'Pepsi', or understand a car air-freshener belongs under 'Automotive' rather than 'General Merchandise'. The results have shown that sooner or later, the idea of breaking these sub-departments has caused far greater problems than it has solved. Most retailers have gone back to four or five basic categories that are selected in accordance with the capabilities of the newest, least trained employee in the store.

  • Groceries
  • Cigarettes
  • Beer
  • Soft Drinks
  • Deli

On the other hand, Item-Level inventory control makes us focus on each and every item in the store. Software designed to run in a CM environment just doesn't work.

If you have only one store and sleep and eat in it, you may be able to manage your inventory by item. It depends on how much time you put in it; but for the multi-store operator, it's a very time-consuming process and you are going to need a more complicated array of tools that do almost all of the work for you.

Almost everything in your store is priced incorrectly and the correct price varies by dozens of factors — among these, time of day, day of week, the season and the neighborhood. I gave an example earlier of how one flavor of ice cream outsold another of the same brand in one neighborhood and how it was the exact opposite in another area located only two miles away.

Other, less common factors that call for the need to pay attention to retail prices include, how well the product is marketed by the manufacturers, economic conditions, competition among other products in your store, the overall image of your store, and the sales abilities of your employees, etc., etc.

As an example: If you want to drive traffic to your store, imagine you place a sign out on the street that flashes:

One-Hour Special!
20 Ounce Coca Cola – 39 cents

Do you think that would drive customers into your store? Of course it would. But you don't want to take these losses for an extended period. The goal is not to sell Coca Cola below cost. It's bait to catch the right customer. And the beauty of this is you can see the results right away. Was the experiment profitable or did it cost you money? By looking at the average overall profit moments after the experiment occurred, you can decide on whether you want to try this again. But you can't do the same thing all the time. Having the tools necessary to schedule these kinds of experiments and then analyze the results and hour later gives you another powerful tool that could not be performed without them.

Let's take it a step further. What if you could change the sign every hour without getting up out of your chair? Yes, you can do that NOW and with the profit generated by companion products it might not cost you a dime. One thing it would do is that it would get customers into your store you have never seen before; and most important of all it will create an environment of excitement and you would get the added advantage of 'word of mouth' advertising. A kind of promotional technique you can't buy at any price. You might even get a local television news crew out there to do a story on it.

The secret weapon is 'Price Control'. It's one of the major factors that made Walmart the largest retailer in the world.

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