Setting Retail Prices - The Immediate Impact
Whenever I work with a new client, they usually lack profits and have excessive inventory. The excessive inventory is a longer project, usually taking six months to one year to get on track. That step involves the establishment of a sales plan and an Open-to-Buy plan.
However, there is a quick fix that can have a fantastic impact for a golf shop. That involves establishing a pricing model.
For many retailers, they have used the old Keystone method and it can be a mistake! Keystone is the doubling of cost to establish retail selling price and that sets an initial mark up % (IMU%) of 50%. ((Planned Retail – Cost)/Planned Retail).
The reason that Keystone is ineffective is that it sets the retailer up for a loss at any markdown level. Let’s look at an item is purchased at a cost of $20 and then marked to $40 for sale. If the item does not sell, then the first markdown is likely to be a minimum of 20%. If sold, this item will sell at $12 profit or 37.5% gross profit. For most retail operations, that represents a loss on the profit and loss statement. Retail shops without green fees will have operating expenses of 40-45% and this will result in a net loss of 2.5-7.5%.
However, if we look at a shop that receives the same item and attempts to sell it at $45, the IMU% is 55.6%. Then the first markdown of 20% results in a gross profit of 44.4% and is either breakeven or profitable. At a 60% IMU, the markdown results in a 50% gross profit.
|
Cost |
Retail |
IMU% |
End Gp% with 20% markdown |
End Gp% with 25% markdown |
|
$ 20 |
$ 40 |
50.0% |
37.5% |
33.3% |
|
$ 20 |
$ 45 |
55.6% |
44.4% |
40.7% |
|
$ 20 |
$ 50 |
60.0% |
50.0% |
46.7% |
|
$ 20 |
$ 55 |
63.6% |
54.5% |
51.5% |
For most of my retail clients, they must have overall ending gross profits that are higher than 40-42% to be profitable. (They don’t have green fees.) Therefore, at keystone method in the first line, they lose money at any reasonable markdown. Many of them now have a total store IMU% of around 60% and markdowns do not kill profits. So the quick fix is to set initial prices slightly higher in order to offset the impact of markdowns.
Can you do it? Not always. You have competition, manufacturers’ suggested prices and customer expectations that impact your prices.
Setting prices, as a buyer, should involve looking at merchandise and then visualizing what your customers would be willing to pay. Hey, you are the expert! If the IMU% is hovering around 50%, then maybe those products would be dangerous to your profits. Conversely, if you believe your customer will pay $60 for a $20 item, then mark it up and try it! Don’t limit yourself to old historical pricing formulas.
I had a client in Atlanta who told me that she could not raise her prices or her customers would revolt. I knew that her customers had no idea how she set her prices and would not know if new prices represented a change to pricing. I told her to give it a year (or face bankruptcy) and she told me within six months that she did not believe she had found the upper limits that her customers were willing to pay! Within that period, she went from red to black on her financial statements!
That is the short term start to fixing your retail woes.The long term health of retail in a golf shop involves the development of a sales and inventory plan for each department in the shop. That will be the subject of another article.
Alan Fisher is the leading expert on inventory management in the golf industry. He has conducted numerous seminars across the US and Europe for the golf industry and has authored numerous articles on maximizing retail inventory. If you would like to know more about how you can make your retail a profitable part of your business, please contact him at any of the following:
alan.fisher@mygolfretailguru.com
+1 619.723.4653 mobile
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