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All you believe…may be ALL WRONG – Belief #5

Misconception #5 – Lower Your Prices and Make it Up on Volume

(Read time approx. 3 minutes.)

This is the fifth misconception in a series of six. The concepts being discussed here will likely be counter to your beliefs. The comments left on the previous posts are quite interesting so you may want to go back and read them. Click HERE to go back and begin with the first post related to this series.

Possibly one of the greatest travesties to befall the independent garden center as an industry is the fallacy that if you offer lower prices you will “make it up on volume”.

This is what I  call Fifth Grade Economics. The general level of knowledge about economics in our industry was learned in fifth grade social studies class. In my fifth grade class Mrs. Woods taught us about supply and demand, and how if you lowered the price you would “make it up on volume”. Unfortunately this same macro-economic principle has been perpetuated in higher education and has not been balanced with understanding of the micro-economic application in an independent garden center serving niche demographic and psycho-graphic customers.

It may be true that more units of garden center products and plants are sold to US consumers through the combined efforts of mass merchandise chains and independent garden centers. However, I  do not see any economic benefit of that additional volume to more than a handful of folks who are directly involved in our industry. The downward price pressure of commoditization at wholesale and retail levels is actually depriving our industry supply chain of the margin dollars necessary for continuing a healthy business. Radical change beyond the application of LEAN processes is occurring as the effect of a poor economy forces weaker companies to exit the competitive environment. For now, their volume is being redistributed among the last men standing. Yes, this comes with free enterprise, however it is accelerated by a lack of understanding and incorrect application of this basic supply-demand economic distribution model.

The “Make it up on Volume” trick should be reserved for items sold in high volume through mass market retail stores and that is where it began in our industry. In the earlier days of the independent garden center business some companies in reasonable proximity to larger population centers were able to trade price for volume and come out fairly well off. Remember that some of their brethren were equally as successful promoting a value-added business model and earning even more money during those days preceding the discount format mass merchants entering the garden center business. Now the DNA of those companies demands that they exploit more commodities to drive yet more traffic through their stores.

The “Make it up on Volume” folks that have made it this far are now ensnared in a deadly trap where operating margins are lowering as the costs of doing business rise. To continue to compete on price they must advertise low prices even more aggressively to draw enough able-paying customers past the myriad other mass merchants as well as value-added independent garden centers just to pay their bills. Where does this low price/high volume philosophy lead? Just this week I read that an 82 year old owner of a 90 million dollar garden center chain famous for selling on low price/high volume doesn’t think he can sell his business for more than the value of the real estate and equipment.

Price Elasticity of Demand is the economic principle we’re talking about. It is true that sales volume of some items increases while more consumers are attracted to purchase them as prices drop. Customers who are attracted by lower prices may also use the product more frequently and in greater quantity over a period of time.

For example, Kroger recently advertised gallon jugs of milk for $1.75 in a local market. While Walmart has been aggressively advertising the savings they offer on the total shopping basket everyone knows that the price of milk is  about $3.25 to $3.50 and Kroger wins a shopping trip from nearly everyone in the market. Those milk-buying shoppers include the die-hard loyal Kroger shopper as well as many Walmart low price shopper regulars who intend to “cherry-pick” but inevitably get caught up in other deals that are more lucrative to Kroger. These folks stock-up on milk to save the maximum amount they think they can use before the milk they purchase would spoil. They pour more milk until it is gone, then most of them return to their regular shopping pattern or the next sale-price induced one.

Most garden centers have adjusted to selling fewer Known Price items as discounters and big-box chains have created commodities out of Miracle Gro, Proven Winners, flats of annuals, cell packs of annuals, gallon perennials, etc. (This is NOT to imply that independent garden centers should not sell these items at all.) As more items are commoditized independent retailers have failed to adjust tactics and have no solid game plan on how to  hold onto the margin dollars they need to earn on the high quantity items they sell. Commoditization is fueled by suppliers who offer no control of their distribution to protect their retail outlets.

When 4″ specialty annuals and 5″ Poinsettia are heavily advertised at $.99 during prime buying season by two major mass merchants in many US markets this year the rapid commoditization phase of the Price Elasticity of Demand Game is officially on. Someone – maybe everyone is about to get hurt!

The Price Elasticity of Demand Game

An independent who chooses to remain relevant and competitive in the same market as discount merchants has to play the Price Elasticity of Demand Game the way it is intended. This game has no favorite. In this game the challenger has entered the low price/high volume arena and the incumbent value-added retailer must resist the pull to join them or join the race to the bottom – end of game.  The other side of this game table is the Inelastic side and that is where they must the value-added retailer must choose to sit, but not just wait out the competition if they wish to continue as a viable provider to the customers who choose to purchase their added-value offer. They must devise new tactics.

New Belief #5 – You must do the hard work to add value and differentiate your company to earn the margin dollars you need to sustain your business.

Product Differentiation

On the value-added side of the game table the rules are the same but the game pieces are different. The incumbent (high/value independent) must play with game pieces (products) of Unknown Price, leaving game pieces of Known Price and relatively low operating margin to the challenger.The basic idea is to create in-elasticity by offering highly desired and highly valued products at prices that allow a high operating margin.This is also known as Product Differentiation.

Choosing Supply Chain Partners

Executing this strategy is not easy in a marketplace where person charged with selecting products to sell are matched with suppliers who ignore or are unable to meet the strategic need of their retail partner to offer differentiated products and a margin of protected from high volume/low price competition. I can think of no such product supplier to our industry supply chain other than in the gift categories. Vera Bradley for example sells through a limited number of authorized retailers and strictly enforces discounting within their legal limits. Instead, many garden center suppliers provide exclusive product opportunities and other benefits to their mass retail distribution partners. And those that do partner with independent value-added retailers do not limit distribution within a market, provide suggested retail pricing, or invoke discounting parameters.  Of course one of the reasons they don’t offer these controlled distribution benefits is that most independent garden centers don’t understand them and resist the notion of being restricted by these types of vendor rules. (In other words, we have met the enemy and he is __.)

Environment Differentiation

To the degree products are differentiated by quality of ingredients, performance and design the physical environment in which they are offered to consumers must also be differentiated. The value-added side of this game table looks different to the consumer. From colors to quality of display materials to spacious room for customers the atmosphere is more inviting and comfortable. Meanwhile others are drawn to choose to spend less for less in the low price/high volume retail environment that is often more crowded and less attractively decorated.

The cost of differentiation has been a controlling factor in the past, however low price/high volume providers have been using their economies of scale and design to break the barrier (visit an updated McDonald’s restaurant) and increase margins on commodities such as coffee. Another nemesis of low price/high volume stores in the past has been cleanliness. This has been given much needed attention in mass merchant stores. It is getting to be even more expensive and difficult and even more important to differentiate on the basis of atmosphere.

Service Differentiation

Providing a value-added experience through offering services whether included or optional and additional create in-elasticity or differentiation. Mass merchants have responded to the service edge long possessed by independent garden centers with no-questions-asked guarantees, certified specialists, in-store vendor merchandising, and even plant installation services in some areas. The most viable level of differentiation by service is that of long-term personal relationship and connection between the salesperson and the consumer.

Total Perceived Value

The customer perceived TOTAL VALUE TRIANGLE –  Product, Store Environment, and Service

Achieving a winning level of total value perception by the consumer requires exceeding the minimum expected level of service and provide noticeable difference in all three value areas.

The role of each type of retailer is to represent the total value they offer as completely as possible and in context of how the consumer perceives the value they receive from the products, environment, and services. This is done by product and store design, marketing messages, and ultimately the repeat business and word of mouth from their consumers.

Who Will Win?

We are only concerned with helping the independent value-added retailer succeed, and the only way we know to successfully do that is to differentiate in all three areas of the total value triangle. Those who choose to fully engage in providing the most highly differentiated value have a place at the table where stakes are high and clear separation from mass retailers is a must.

Leave a Reply – How do you differentiate on Product, Store Environment, and Service?

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5 Responses

  1. […] This post was mentioned on Twitter by Amy Daniel, Sid Raisch. Sid Raisch said: All you believe…may be ALL WRONG – Belief #5 – Misconception #5 – Lower Your Prices and Make it Up on Volume. (Rea… http://ow.ly/169N2H […]

  2. Steins as everyone knows in Wisconsin is a low ball price competaitor.

    Franks failed. Pike failed. The Garden Center and greenhouse industry is a mature industry with deceasing household penatration, Why would any company want to buy into a Seasonal busninss like Steins that has built a reputation as a low ball price leader with acceptable stuff. They do buy locally but a lot of their plants come from Bert Hybels in Michigan.

  3. […] This post was mentioned on Twitter by Sid Raisch, Kellogg Jonathan. Kellogg Jonathan said: RT @sidraisch: Will your garden center "make it up on volume"? http://ow.ly/MhbL […]

  4. Thanks for commenting Ed. I know others who have felt the quality of what they receive from Hybels is excellent. Some folks will undoubtedly be upset with your comment on Bert Hybels but I know you mean that your plants are the best you can possibly grow and the best garden performers you can find. I have seen your plants myself and with very few exceptions I would not want to be competing with you at America’s Best Flowers on plant quality or garden performance.

  5. […] This post was Twitted by sidraisch […]

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