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David Geller

David Geller: Everyday Low Prices

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Negotiating discounts with customers is a slippery slope, writes David Geller.

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Should you negotiate price with your customers?

[h3]Everyday Low Prices[/h3]

[dropcap cap=W]hat a topic! Everyone wants a bargain and the American public has been taught to wheel and deal. The sale mentality is everywhere: Car sales, clothing, computers, shoes, office supplies. Jewelry? Are you kidding me? We’re the kings (and queens) of wheeling and dealing![/dropcap]

Many jewelers will mark up their prices, merely to provide wiggle room for discounts they use to make a customer feel comfortable and that they received a good “value.” There are two arguments as to whether you should do this or not.

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[inset side=right]Even though you’ve marked an item up to mark it down, you’ll probably end up discounting it even further to get the sale.[/inset]The pro-discounting argument goes “Everyone else does it” and that you must also discount simply in order to compete. A sale brings in traffic and a nicely-run sale can increase cash flow. (But please notice that I didn’t say “profits” right off the bat.)

The anti-discounting argument is even larger. From square one, you’ve set yourself up for every sale by these customers to be discounted. But the worst part, in my mind, is this: Even though you’ve marked an item up to mark it down, you’ll probably end up discounting it even further to get the sale. And, chances are, if pushed hard enough, you’ll end up selling it below that magic dollar number that you had established as your cushion.  

I can tell you from my travels to stores and phone conversations that retailers who have decided to stop discounting and adopt a “one-price-for-everyone” policy make more money. They pay their bills on time and usually make a larger gross profit percentage. Closer to 50%, while others wheel and deal and end up with a 42-46% margin overall.  

If you discount as a business practice, don’t get me wrong: sure, it can work in your favor. But as Sir Isaac Newton said “For every action, there is an equal and opposite reaction.” If you sell for less you must then sell more units (turn). And if you find that your discounting doesn’t increase sales, then you’re losing ground.  

To sell those additional units, you have to close more people. If 10 people walk in and you sell three, your closing ratio is 30%. If you could sell four out of 10 you’d increase sales by a whopping 30%. Here’s some ways you can make that happen:

[dropcap cap=1.] One reason why you could sell more units by increase your closing ratio is because your sales staff is better trained. That’s sales training.[/dropcap]
[dropcap cap=2.] Another reason you could sell more actual units is because you have more humans walking through the front door. That’s advertising and marketing.[/dropcap]
[dropcap cap=3.] Still another reason you could sell more units is you actually had the products in stock that the customers wanted (not what you thought they wanted) and you had it at the price they wanted to pay. If every sale seems to be a struggle, this could be a big reason. This is a purchasing and merchandising function.[/dropcap]

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Let’s look at the numbers. You’re going to buy an item at $100 and either hike up the price in order to discount it … or just mark it at a normal price and stick to your guns. Look at these two examples and see how many more units you have to actually sell to get the same gross profit dollars in a year.

[h4][b]No discounting-one low price[/b][/h4]

Cost: $100
Selling Price: $195
Gross Profit: $95
Gross Profit(in one year selling 100 units: $9,500

[h4][b]Higher mark up, then discounted[/b][/h4]

Cost: $100
Tagged at: $240
Discounted: $168
Gross Profit: $68
Quantity sold required to reach $9500 gross profit: 140.

You have to sell 40 more units!

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Wow. Just to keep up, if you now sell 3 out of 10 people you have to sell 4.2 out of 10. Can you and can your staff do that? Well, you’ll have to if you want to make up for all those big discounts you just handed out.  

You can run your own numbers, and see where you’ll end up with different pricing approaches. Let’s say you try to sell the item for the full retail price of $240, not $168 or even $195. In that case, to make $9,500 in gross profit dollars, you’d only have to sell 68 units — 32% fewer sales you’ve have to make to still gain $9,500. Hmm.

Of course, it may be harder if your competition is selling for less. But a lot of the resistance you’ll encounter can be overcome with better sales training, or smarter purchasing.

It may be tough to convert and retrain the customers to your new “everyday low pricing”. It may even take a year. But after you finish that bottle of Pepto Bismol, you’ll be set.

David Geller is an author and consultant to jewelry-store owners on store management and profitability. E-mail him at [email protected].

[span class=note]This story is from the July 2004 edition of INSTORE[/span]

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