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The $5.26 Million Dollar TOO High Cost of TOO-LOW Prices

Are you LOSING 2% or MORE of your Bottom Line to Poor Pricing?

As moderator of the session on Pricing Strategies for Profit at Today’s Garden Center magazine’s Revolutionary 100 Roundtable held in Atlanta’s America’sMart I asked the people representing the 22 companies in the session if they would write down on the note pad in front of them the number representing 2% of their annual sales. Then came my challenge to them.

The challenge was to put the piece of paper on the front of the table for me to pick up if they had learned enough new information about pricing in the previous hour of the session to add a minimum additional profit of 2% of sales to their bottom line in 2010 – WITHOUT THE CUSTOMER NOTICING. I would then pick the note paper up and have the event staff total them and share the number at the Town Hall closing session. ALL of them did. And what a number we had to share!

A total additional profit of $5,261,000.00, averaging $239,000.00 per company was produced. The least amount claimed was over $30,000.00. And think about it – every one of these companies has left those dollars on the table every prior year. Did you?

This was not about cavalier price raising. It was about increasing prices where and how the customer doesn’t notice. 100% of the additional price goes directly to the bottom line. Who cannot afford to do that?

If you don’t know what you need to know about pricing to make your company more profitable now when will you acquire that knowledge? Oh, and to those now wiser companies at the Rev 100…how much more profit might you have been able to add to your bottom line if we could have invested the rest of the day learning more about pricing? (We can, just call me. (If you can’t afford to have me show you call anyway and I’ll split the additional profit with you. Let’s see, my share would be $2.63 Million.)

A lot of people in our industry have been doing a very good thing the past month or so. They’ve been attending various events in hopes of taking home some (even just one or two) “good ideas” that would help their company be more successful this year. Those hopes almost always focus in on promotions, events, and new products that will give their business a sharper edge against the economy. Nothing wrong with a sharper edge to battle a tough economy is there? Certainly not. But it will never make up for making the money you should be making in the first place. You see, it is what you don’t know about fundamentals of your business such as pricing that often costs you the most.

Hey, why not leave a comment or reply to tell us what are you doing to make 2010 your most profitable year ever?

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8 Responses

  1. I am reading a book right now that said commodities have averaged about a 1.5% drop in price every year for a long time. So get out of the commodities business.

    If something sold last year at $1.99 raise the price to $2.05 and it is only a 3% increase. We will do this kind of increase this year.

    A couple of years ago we had customers telling us our price was cheaper than the big box store but our quality was better they said. Well that was when I knew our price was too cheap and we started raising prices. I want to lead the price in my town not trail!

    Now my thought is I want to hear someone say we are too high. I don’t want everyone saying that or my price is probably too high but I want at least one person to say it to us.

  2. Tim you are on the right track. However, once you cross the price threshold of $1.99 you might as well be at $2.99. It may feel gimicky but it does work! There are three differences – $.95 cents, thousands when you total up all the items you can do this with, and NOTHING to the customer.

    Yes, you do want to hear that your prices are too high. This is often taken by the merchant as a price objection when it is in fact a VALUE question. The consumer is asking you to justify the value. God help you if you cannot. Manage your price perception but do not sacrifice your margin to do so.

    There are price principles which you cannot change, but may not be aware of. They must be respected. There are price rules and you can make them up same as anyone else. They may help or hurt and you must know which it is. There are also pricing tactics or techniques that can be applied to optimize your margin yield – generally without the customer noticing. This is the type of material we cover in our Merchant Advantage program, and then help our clients implement based on their unique marketplace situation.

    Since somewhere around 100% of retail revenue is from the price we decide to charge it is kind of important, yet is an area of business people enter with strong and often uninformed opinions that can cost them all of the bottom line and even a loss, or can enhance their profits so they can continue in business and offer their customer the superior value in the marketplace.

  3. The ‘Quiet’ Price Increase, a great tool for any business. We are seeing and hearing from our client base (IGC’s) a reaction of lowering prices. This is a concern we have for our clients and the impact on net income these actions will have.

    Reducing Sales discounts by 1% is also equivalent of a 3% price increase.

    A 3% price increase is equivalent to a volume increase of 8.6% , when measuring bottom line.

    Of course Price increases must provide for ‘value as well to implement.

    However, a Price Decrease of 3% requires increasing volume by 9.4% to have a neutral affect on a Garden Centers bottom line!

    During these ‘challenging’ but exciting times to be in business, I applaud your work.

  4. Great thoughts Don. Please point those folks who are nearing the edge this direction.

    I know of several garden centers who chose to follow poor advice that was widely prescribed to our industry in 2009 and decreased pricing. In every situation they lost unit and gross sales as well as margin dollars sorely needed to pay the bills. DON’T TRY THIS AT HOME!!!

    Focusing on the value provided through product selection, presentation, and personal service is the only thing that works for specialty retailers. It is one of the foundational principles of business.

    Again, increasing prices just to be doing it can be dangerous. Providing greater value (at a greater price) is not so much a shortcut to increasing sales and profits, but reducing prices is certainly a shortcut to disaster.

  5. A reminder that there’s a percentage difference to be found just by using .99 instead of .95, not to mention the .89 and .79 items. I went through our entire catalog making this change. Sounds trivial but it adds up even in a tiny store like ours. Thanks Sid!

  6. You are correct Steve. Pennies do make dollars too. Combining the pennies and the bigger amounts we have clients who have broken double digits of margin increase with the bigger amounts – in one spring season.

  7. Steve Boehme
    I went to your website and throughly enjoyed your email conversation with the customer in your 2009 spring newsletter about your prices being to high. Your final comment was right on!

  8. “Focusing on the value provided through product selection, presentation, and personal service is the only thing that works for specialty retailers. It is one of the foundational principles of business”

    If the above is provided in an exceptional manner price really does not enter into the customers mind.

    Most of us have the same or similar products, presentation and signage is now acceptable in most of the better garden centers but from my visits personal service just is not there. Some garden centers are better than others but most have a long way to go. Perhaps a standard should be 10% or an even larger percentage of the customers must post a positive comment on a facebook or other review page for our personal service to be at an acceptable level.

    Communication is a wonderful thing. We have a long ways to go in communicating with our customers and perhaps even with our associates.

    I am not sure why we have major garden centers who are not tying sales to a particular customer. What better way to better communicate with the customer than understand what they are buying. Remember no loyalty program is worth the time and effort if you are not wiling to market to customers based on what they purchased, on margin dollars, and the life time value of the customer.

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