Columnists David Brown Setting your Selling Price for Maximum Profit

Setting your Selling Price for Maximum Profit

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One of the most interesting reports I like to read from store data we collect is one known as “Price Points Potential Net Profit.” This shows the potential additional profit a store may make by rounding its prices off to the appropriate price point. Often for a business this missed profit can be in the thousands when all inventory is taken into consideration.

Yet despite this, convincing store owners to maximize their profitability on each item can be a difficult task. Too often the barrier to increased pricing is a mind-set, the glass ceiling that store owners put on themselves when it comes to believing what they can charge.

 Most retailers depend on a cost plus mentality when it comes to setting their retail price on goods. This  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 the item has 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 out sell the other by ten times to one. Should they be the same retail price?

The only price that really matters is what a willing buyer is prepared to pay for the item. That said you need to test the market to determine the profit potential on every item you buy, as a few extra dollars of profit will go straight to the bottom line if you can achieve it.

Let’s illustrate with an example.

Tom has a popular selling item in his store that he turns over 5 times per year. The item has a wholesale of $25 and sells for $45 (let’s ignore any taxes for this exercise).

In the space of a year Tom makes $20 profit ($45 - $25) times the 5 sales or $100 profit on this item. But is that the true value he can achieve for it?

Let’s say Tom tests the market at a $49 price point and finds there is no buyer resistance. He is now making $24 per item ($49 - $25) times 5 sales per annum or $120 of profit, an extra $20 per annum over the $100 he made each year at the old price.

Now this may not seem significant with one item but multiply this by 500 items (and bear in mind that larger priced items could be contributing an extra couple of hundred dollars per sale) and you start to see the impact this has on his bottom line, and he suffers no extra overheads in achieving these sales. In fact, in some cases he could be selling less items and still making more profit per item annually.

So how do we determine what an item can sell for?

1. Get away from a cost plus approach. 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.

2. Revisit the prices on your best selling items each time you reorder them back in (you do re-order them don’t you?). If you have a new item that sells quickly at say $329, you’ve just learned something: 1. The public like 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.

3. Let someone else set your prices. If you have too big an issue with it then give the job to someone on the staff who can look at it objectively and unemotionally. Get over the idea that you can overcharge someone. The customer will only pay what the item is worth to them. No one is going to make them buy it if they don’t want to. Be up front and honest with all aspects of what they are buying, then let them dictate the price.

David Brown is President of the Edge Retail Academy. For further information about the Academy’s management mentoring and industry benchmarking reports contact This e-mail address is being protected from spambots. You need JavaScript enabled to view it or call 877-569-8657.

 
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