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Home Columnists

Your customers don’t think “Cost Plus” and neither should you

David Brown by David Brown
July 1, 2010
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Reading Time: 8 minutes

One of the most controllable yet neglected areas of jewelry retailing is mark up. Most new product coming into a store is priced on a standard mark up percentage. The assumption is made that the customer wouldn’t pay any more for it than this. Although a good starting point, it can often mean, at best, that profit isn’t maximized on individual items that have represented good buying. At worst it may mean that thousands of dollars of profit are given away if the percentages used are too low.

This can be difficult to manage in the good times, but when economic times are tight it is very easy to start reducing mark ups in an attempt to lure customers into the sale.

Does the customer really know what an item is “worth” on the market? I can show you they don’t. Ask four staff member to give you the retail value of an item that is new into store without seeing the price ticket and you’ll get 4 different answers that will vary markedly… and this is from people who know the product and industry.

Your customers aren’t assessing value based on an appreciation for the grams of gold and size of the stone. So what basis are they using?

Simple. It’s whether they like the item or not.

If you want to test this, just look at two solitaires that have identical stones and a similar gold weight in them, but different settings. One is an aged inventory item and the other a fast seller. Both have the same wholesale cost, the same mark up and the same retail price. Yet the fast seller has sold more often. Are these two items worth the same to the customer? Of course not. So why insist on pricing them identically?

Even in strong economic times many jewelers are guilty of under pricing their inventory and this can be for a variety of reasons. Take note if you have used any of these to describe your situation:

You feel you could never put more mark up on…

Have you tried? Who is the best judge of what your jewelry is worth? The answer is the customer. They will decide if your product is overpriced. Don’t assume you know, as it will cost you thousands of dollars per annum in lost profits if you guess wrong.

You feel your business is different…

In this case the store owner feels they have some sort of unique circumstance that makes it difficult to increase their mark up. Although this may be true in some circumstances, in most cases other retailers are trading under the same “restrictions” and yet seem able to achieve better mark ups.

You feel you have too much competition…

Again another misconception. There are stores trading in malls with 8 or 10 direct jewelry competitors who are still able to command good margins on their inventory. What’s stopping you?

If price was the only factor involved in buying decisions then the jeweler with the lowest mark up would be getting 100% of the customers.

Instead, that jeweler normally finishes up going broke because they make the assumption that price is everything that matters.

So how do you go about it?

1. Make a conscious decision to increase your mark ups. The right attitude to pricing is half the battle. This may seem a difficult decision to make given the current environment, but your customers are seeking good savings, not a low starting price. If you feel pressure to discount, it is much better starting from a higher starting point.

2. Don’t put the inventory in yourself. Not unless you are confident you can follow through. A staff member who is a little more relaxed about marking up may do a better job of maximizing the pricing than you will! If you have the right person let them at it – they will be worth their weight in gold.

3. Listen to what your customers tell you. And they tell you every day with the inventory they buy. If the same item flies off the shelf regularly, then it is a pretty good sign that it can handle a higher price – so price it up. Will you get it wrong and overprice sometimes? Yes. But for everyone you do there will be five others that will sell just as well at the higher price to more than make up for it. And if you get it wrong you can always bring the price back down. Once an item has sold twice then the next time you get it back try a little bit higher price. Make that $149.95 bracelet $159.95. Your business is there to meet the customers’ needs, but it has to look after your needs first.

4. Price point your inventory. What does this mean? If you have a diamond ring that sells for $2837 then chances are the market won’t stop liking it if the price becomes $2895 – they will probably still love it at $2995. Either way you are better off and the customer is still happy. Even including the cents (i.e. making $49 into $49.95) can make all the difference. One store that added 99 cents onto the price of everything under $200 they stocked added $6000 to their annual profit… that 99 cents can sure add up!

5. Ask your staff. Show them an item you are looking at buying or pricing and have them tell you what it is worth without letting them know the cost. As mentioned above, the results will be interesting. You will normally get an average higher than what you would have priced it at using standard mark ups – and this is from people who know jewelry! If nothing else it will show that cost price is only a small factor in determining what jewelry is worth.

Don’t forget the replacement cost. In the current market of rising gold prices many items will cost you more to replace. If you don’t allow for this in your pricing you will expose yourself to cash flow problems when you buy stock back in.

David Brown is President of the Edge Retail Academy, an organization devoted to the ongoing measurement and growth of jewelry store performance and profitability. For further information about the Academy’s management mentoring and industry benchmarking reports contact Carol Druan at carol@edgeretailacademy.com or call 877-569-8657.

David Brown

David Brown

David Brown is the President of The Edge Retail Academy (sister company of The Edge), a jewelry business consulting company that provides expert advisory services to help with all facets of your business including improved financials, healthier inventory, sales growth, staff performance, retirement/succession planning - all custom-tailored to your store’s needs. By utilizing the power of The Edge, we analyze Key Performance Indicators that point to current challenges and future opportunities. Edge Pulse is the ideal add-on to better understand critical sales data and industry market trends to improve profitability. It benchmarks your store against 1200+ other Edge Users and ensures you stay on top of industry stats. 877-569-8657, ext. 001, Inquiries@EdgeRetailAcademy.com or www.EdgeRetailAcademy.com.

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