Wednesday, May 18, 2011

The Case Against Category Management –Pricing -2

Take a look at the two simple diagrams located at:

The one at the top is a simple, graphical explanation of the workings of a gasoline engine: Gasoline is processed by a carburetor, affected by air flow and the pressure applied to the accelerator, causing the engine to produce power to turn the wheels of a car, lawnmower, pump, etc.

The second diagram is a similar one, explaining the workings of a retail store: Products are processed by customers, affected by various outside influences and the items’ retail prices, creating turns multiplied by margins, hopefully producing a profit. Of course, as always, “the devil is in the details,” but it’s disheartening to me as to why so many retailers ignore the importance of each one of these vital components.

Like me, you may not be an engineer, but if you had to design an engine and didn’t pay close attention to air flow and the accelerator, you would probably end up with a heavy, block of worthless steel, wouldn’t you?

If we don’t give serious thought to presentation, popularity and the current outside as well as the inside store environment, what are the chances for us to produce a profit? When I see the average convenience store realizing a net profit before taxes of around 2% (or less) it makes me wonder.

Studying these simple diagrams gives us a framework to adjust the outcome. If a product is not producing a profit, we simply backtrack to see which step is broken. If the turns and margins look bad, it may be the fault of the price, or even the customers I am trying to sell to. In fact, it may be the way the products are presented. Heck, it may be I’m trying to sell the right products to the wrong customers or vice-versa.

Choosing the right products doesn’t mean letting our suppliers decide what to put in our stores, does it? How about encouraging profitable customers and discouraging non-profitable ones… who thinks about that?  If we allow our store to become a popular gathering place for the neighborhood gang, who spend little and do nothing more than frighten away paying customers, is this good for our business? Of course it isn’t. But, we have a store exactly like that in our neighborhood where my wife refuses to shop because of the congregation of young men milling around in front of the store every day.

Pricing without consideration for customers or the popularity of products and the presentation doesn’t make any sense either; and without controlling turns and letting someone else decide what margins we’re to make on a sale… it just gets worse and worse.

Retail is a simple business, if you’ll only pay attention to detail. Even the most complicated of operations can be broken down into a simple set of steps that any intelligent human being can follow. Now, if they don’t want to understand, that’s a different question entirely. But letting someone else do it, who’s  too busy to do what you should be doing in the first place, that’s just inexcusable neglect, and people who expect to make it in retailing and refuse to pay attention to detail, well.. I guess their getting just what they deserve. If I’ve hurt anyone’s feelings, you have my sincere apologies.

Retailing can be an exciting and fulfilling life experience, but if you find it boring, do something else, or better still, find something about the business to get interested in. Think back to why you got into retailing to begin with. 

After you select the correct products for the right customers, and have created the right atmosphere for the clientele you’ve selected… that’s right, you select them not the other way around… pricing is the next most important thing on your list. In fact, it just may be the most important step in the entire process.


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