Columnists David Brown Setting your retail price – what’s cost got to do with it?

Setting your retail price – what’s cost got to do with it?

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Most retailers depend on a cost plus mentality when it comes to setting their retail price on goods. This week David Brown investigates a more profitable alternative.

Apologies to Tina Turner for the paraphrasing on her ‘80s hit, but it is a relevant question when so many jewelers use cost as a factor in determining their retail prices.

Certainly it can be a good starting point, as without knowing your cost you won’t know what you need to achieve to make a profit - but is your wholesale price a factor that your customers consider when they come to make the purchasing decision? No, of course not. Nor do they care. Their only interest is what value does the item have to them.

So should cost be the factor you use in determining the prices you set?  Lets come back to what cost is based on.

Your vendor, like you, has determined what it has cost him to purchase the raw materials and pay his jewelers on an hourly rate to create the piece in the first place. He then adds on his standard profit margin. Is this what the item is worth? Again no, he has charged you based on his inputs and overheads, and on the desired level of profit he feels he can seek on this item. Yet two rings could be made by the same vendor with identical materials and the same length of labor time and one may outsell the other by ten times to one. Should they be the same retail price?

There is only one factor that has successfully determined the retail price of any item throughout history. It is the basis of economics and the fundamentals upon which capitalism was built... and that is the law of supply and demand.

The market price for any item is invariably correct when the amount sought by a willing seller and the amount paid by a willing buyer meet. This price can depend on a number of factors - scarcity, appeal of the item, purpose for which the buyer is purchasing, and so on. The fair price can vary from buyer to buyer and seller to seller depending on their individual needs, yet with too many products we insist on a one price fits all mentality.

Airlines don’t do this – they have perfected the art of selling seats on a supply and demand basis. If you don’t believe me ask the guy next to you what he paid for his seat when you next fly. You will either get a pleasant surprise or a rude shock!

Likewise, just before Valentine’s Day, how much do you expect to pay for a dozen long stemmed, red roses?  Two to three times more than at other times of the year.  And yet at the same time, jewelers right across the country are discounting their beautiful jewelry because they fail to understand what customers really want is value for money (not a cheap price), a quality product, great service and to buy from people they trust.

So how can we use supply and demand to set our pricing with jewelry?

First, get away from thinking in terms of cost. Show your staff any new item you are looking at buying and ask them what they feel it should sell for without telling them the wholesale price. You would be surprised at the variety of responses you get, and this is from people who know and understand jewelry! This is how your customers view your jewelry and the way you should look at it too.

The components are not the important parts of an item, it is the overall look that matters. You know this when you look at that tired old pendant that has sat in the display and compare it to the popular style beside it that seems to sell out every time you buy it in. They may cost you the same, but their respective values to you and to the public are poles apart. Set your retails based on what you think an item can sell for then use cost to determine if there is sufficient profit in it to warrant selling it.

Second, revisit the prices on your best selling items each time you reorder them (you do reorder them don’t you?). If you have a new item that sells quickly, at say $329, you’ve just learned something:

1. The public likes it

2. There was little resistance to the price for it to have gone so soon. Next time you buy it back in, try it at $395. But what if it doesn’t sell, I hear you say? Then bring it back down to the original price after 40 days.  All you have lost is a month to six weeks of trying the new price point.

Now, you may think it’s not worth it for $66 – and you’d be right if $66 is all we are talking about. But let’s multiply it across an entire store. If you carry 5000 product lines and 1000 of these are good sellers, and you received even an extra $20 each time you sold them, that would be worth $20,000 per year, assuming they only sold once.

Realistically, however, the good sellers probably average 3- 4 sales per year, so now we are talking $60,000 to $80,000 per annum, and that’s straight profit as the item hasn’t cost you any more to buy back in. Sure some items won’t sell at the new price, but for every one that doesn’t there is another 4 or 5 that do.

Then you get to the really good bit. What if it sells straight away again at the new price? You put it up to the next price point of course! For every item that doesn’t sell at the new price there will be others that will generate an extra $10, $20, $50 or more in additional profit because you recognized that not all items are created equal and some justify a premium price. Larger ticket items, of course, can justify an increase of $50, $100 or more relative to their value.

So how do you know when you have reached the maximum price? When your customers tell you, i.e. demand drops and sales begin to slow.

The market will soon tell you what an item is worth. Online auctions like E-Bay have been using the supply and demand approach for years. Your customers use it when they try to bargain your price down, so why shouldn’t you? Does it require effort to do this? Sure it does. I would suggest concentrating on the bigger ticket items first where you have less items to monitor and can get more bang for your buck.  But based on the scenario outlined above you could have a staff member full time on sorting and re-sorting this product and still turn a profit from the exercise.

Of course the ultimate would be to know how much each individual customer is prepared to pay for an item when they walk through the door... but that would involve the sort of mind reading skills that an article like this can’t cover!

David Brown is president and founder of The Edge Retail Academy, a company offering industry benchmarking and management advice to increase profits. If you would like more information on how The Edge Retail Academy can help you control your inventory and add more dollars to your bottom line contact This e-mail address is being protected from spambots. You need JavaScript enabled to view it , call 877-569-8657 or visit www.edgeretailacademy.com.

 
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